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FOMC_Meeting_Statements_Minutes

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2012-10-04

Minute

Minutes of the Federal Open Market Committee September 12-13, 2012 A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Wednesday, September 12, 2012, at 10:30 a.m. and continued on Thursday, September 13, 2012, at 8:30 a.m. PRESENT: Ben Bernanke, Chairman William C. Dudley, Vice Chairman Elizabeth Duke Jeffrey M. Lacker Dennis P. Lockhart Sandra Pianalto Jerome H. Powell Sarah Bloom Raskin Jeremy C. Stein Daniel K. Tarullo John C. Williams Janet L. Yellen James Bullard, Christine Cumming, Charles L. Evans, Esther L. George, and Eric Rosengren, Alternate Members of the Federal Open Market Committee Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, Presidents of the Federal Reserve Banks of Dallas, Minneapolis, and Philadelphia, respectively William B. English, Secretary and Economist Deborah J. Danker, Deputy Secretary Matthew M. Luecke, Assistant Secretary David W. Skidmore, Assistant Secretary Michelle A. Smith, Assistant Secretary Scott G. Alvarez, General Counsel Thomas C. Baxter, Deputy General Counsel Steven B. Kamin, Economist David W. Wilcox, Economist David Altig, Thomas A. Connors, Michael P. Leahy, William Nelson, David Reifschneider, Glenn D. Rudebusch, William Wascher, and John A. Weinberg, Associate Economists Simon Potter, Manager, System Open Market Account Nellie Liang, Director, Office of Financial Stability Policy and Research, Board of Governors Jon W. Faust, Special Adviser to the Board, Office of Board Members, Board of Governors James A. Clouse, Deputy Director, Division of Monetary Affairs, Board of Governors; Maryann F. Hunter, Deputy Director, Division of Banking Supervision and Regulation, Board of Governors Andreas Lehnert,1 Deputy Director, Office of Financial Stability Policy and Research, Board of Governors Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors Seth B. Carpenter, Senior Associate Director, Division of Monetary Affairs, Board of Governors Thomas Laubach, Senior Adviser, Division of Research and Statistics, Board of Governors; Ellen E. Meade and Joyce K. Zickler, Senior Advisers, Division of Monetary Affairs, Board of Governors Brian J. Gross,2 Special Assistant to the Board, Office of Board Members, Board of Governors Eric M. Engen, Michael G. Palumbo, and Wayne Passmore, Associate Directors, Division of Research and Statistics, Board of Governors Fabio M. Natalucci, Deputy Associate Director, Division of Monetary Affairs, Board of Governors Edward Nelson, Section Chief, Division of Monetary Affairs, Board of Governors Jeremy B. Rudd, Senior Economist, Division of Research and Statistics, Board of Governors Kelly J. Dubbert, First Vice President, Federal Reserve Bank of Kansas City Loretta J. Mester, Harvey Rosenblum, and Daniel G. Sullivan, Executive Vice Presidents, Federal Reserve Banks of Philadelphia, Dallas, and Chicago, respectively Cletus C. Coughlin, Troy Davig, Mark E. Schweitzer, and Kei-Mu Yi, Senior Vice Presidents, Federal Reserve Banks of St. Louis, Kansas City, Cleveland, and Minneapolis, respectively Lorie K. Logan, Jonathan P. McCarthy, Giovanni Olivei, and Nathaniel Wuerffel,3 Vice Presidents, Federal Reserve Banks of New York, New York, Boston, and New York, respectively Michelle Ezer,4 Markets Officer, Federal Reserve Bank of New York Potential Effects of a Large-Scale Asset Purchase Program The staff presented an analysis of various aspects of possible large-scale asset purchase programs, including a comparison of flow-based purchase programs to programs of fixed size. The presentation reviewed the modeling approach used by the staff in estimating the financial and macroeconomic effects of such purchases. While significant uncertainty surrounds such estimates, the presentation indicated that asset purchases could be effective in fostering more rapid progress toward the Committee's objectives. The staff noted that, for a flow-based program, the public's understanding of the conditions under which the Committee would end purchases would shape expectations of the magnitude of the Federal Reserve's holdings of longer-term securities, and thus also influence the financial and economic effects of such a program. The staff also discussed the potential implications of additional asset purchases for the evolution of the Federal Reserve's balance sheet and income. The presentation noted that significant additional asset purchases should not adversely affect the ability of the Committee to tighten the stance of policy when doing so becomes appropriate. In their discussion of the staff presentation, a few participants noted the uncertainty surrounding estimates of the effects of large-scale asset purchases or the need for additional work regarding the implications of such purchases for the normalization of policy. Developments in Financial Markets and the Federal Reserve's Balance Sheet The Manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets during the period since the Federal Open Market Committee (FOMC) met on July 31-August 1, 2012. He also reported on System open market operations, including the ongoing reinvestment into agency-guaranteed mortgage-backed securities (MBS) of principal payments received on SOMA holdings of agency debt and agency-guaranteed MBS as well as the operations related to the maturity extension program authorized at the June 19-20, 2012, FOMC meeting. By unanimous vote, the Committee ratified the Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account over the intermeeting period. Staff Review of the Economic Situation The information reviewed at the September 12-13 meeting suggested that economic activity continued to increase at a moderate pace in recent months. Employment rose slowly, and the unemployment rate was still high. Consumer price inflation stayed subdued, while measures of long-run inflation expectations remained stable. Private nonfarm employment increased in July and August at only a slightly faster pace than in the second quarter, and the rate of decline in government employment eased somewhat. The unemployment rate was 8.1 percent in August, just a bit lower than its average during the first half of the year, and the labor force participation rate edged down further. The share of workers employed part time for economic reasons remained large, and the rate of long-duration unemployment continued to be high. Indicators of job openings and firms' hiring plans were little changed, on balance, and initial claims for unemployment insurance were essentially flat over the intermeeting period. Manufacturing production increased at a faster pace in July than in the second quarter, and the rate of manufacturing capacity utilization rose slightly. However, automakers' schedules indicated that the pace of motor vehicle assemblies would be somewhat lower in the coming months than it was in July, and broader indicators of manufacturing activity, such as the diffusion indexes of new orders from the national and regional manufacturing surveys, generally remained quite muted in recent months at levels consistent with only meager gains in factory output in the near term. Following a couple of months when real personal consumption expenditures (PCE) were roughly flat, spending increased in July, and the gains were fairly widespread across categories of consumer goods and services. Incoming data on factors that tend to support household spending were somewhat mixed. Real disposable incomes increased solidly in July, boosted in part by lower energy prices. The continued rise in house values through July, and the increase in equity prices during the intermeeting period, suggested that households' net worth may have improved a little in recent months. However, consumer sentiment remained more downbeat in August than earlier in the year. Housing market conditions continued to improve, but construction activity was still at a low level, reflecting the restraint imposed by the substantial inventory of foreclosed and distressed properties and by tight credit standards for mortgage loans. Starts of new single-family homes declined in July, but permits increased, which pointed to further gains in single-family construction in the coming months. Both starts and permits for new multifamily units rose in July. Home prices increased for the sixth consecutive month in July, and sales of both new and existing homes also rose. Real business expenditures on equipment and software appeared to be decelerating. Both nominal shipments and new orders for nondefense capital goods excluding aircraft declined in July, and the backlog of unfilled orders decreased. Other forward-looking indicators, such as downbeat readings from surveys of business conditions and capital spending plans, also pointed toward only muted increases in real expenditures for business equipment in the near term. Nominal business spending for new nonresidential construction declined in July after only edging up in the second quarter. Inventories in most industries looked to be roughly aligned with sales in recent months. Real federal government purchases appeared to decrease further, as data for nominal federal spending in July pointed to continued declines in real defense expenditures. Real state and local government purchases also appeared to still be trending down. State and local government payrolls contracted in July and August, although at a somewhat slower rate than in the second quarter, and nominal construction spending by these governments decreased slightly in July. The U.S. international trade deficit was about unchanged in July after narrowing significantly in June. Exports declined in July, as decreases in the exports of industrial supplies, automotive products, and consumer goods were only partially offset by greater exports of agricultural products. Imports also declined in July, reflecting lower imports of capital goods and petroleum products and somewhat higher imports of automotive products. The trade data for July pointed toward real net exports having a roughly neutral effect on the growth of U.S. real gross domestic product (GDP) in the third quarter after they made a positive contribution to the increase in real GDP in the second quarter. Overall U.S. consumer prices, as measured by the PCE price index, were flat in July. Consumer food prices were essentially unchanged, but the substantial increases in spot and futures prices of farm commodities in recent months, reflecting the effects of the drought in the Midwest, pointed toward some temporary upward pressures on retail food prices later this year. Consumer energy prices declined slightly in July, but survey data indicated that retail gasoline prices rose in August. Consumer prices excluding food and energy also were flat in July. Near-term inflation expectations from the Thomson Reuters/University of Michigan Surveys of Consumers increased somewhat in August, while longer-term inflation expectations in the survey edged up but remained within the narrow range that they have occupied for many years. Long-run inflation expectations from the Federal Reserve Bank of Philadelphia Survey of Professional Forecasters continued to be stable in the third quarter. Measures of labor compensation indicated that increases in nominal wages remained modest. The rise in compensation per hour in the nonfarm business sector was muted over the year ending in the second quarter, and with small gains in productivity, unit labor costs rose only slightly. The employment cost index increased a little more slowly than the measure of compensation per hour over the same period. More recently, the gains in average hourly earnings for all employees in July and August were small. Overall foreign economic growth appeared to be subdued in the third quarter after slowing in the second quarter. In the euro area, policy developments contributed to an improvement in financial conditions; recent indicators pointed to further decreases in production, however, and both business and consumer confidence continued to decline. Indicators of activity in the emerging market economies generally weakened. In China, export growth slowed, while retail sales and investment spending changed little. The rate of economic growth rose in Brazil but was still sluggish, and increases in economic activity in Mexico were below the faster pace seen earlier in the year. Consistent with the slowing in foreign economic growth, readings on foreign inflation continued to moderate. Staff Review of the Financial Situation Sentiment in financial markets improved somewhat since the time of the August FOMC meeting. Investors' concerns about the situation in Europe seemed to ease somewhat, and market participants also appeared to have increased their expectations of additional monetary policy accommodation. On balance, the nominal Treasury yield curve steepened over the intermeeting period, with yields on longer-dated Treasury securities rising notably. Following the August FOMC statement, Treasury yields moved up, reportedly in part because investors had factored in some probability that the anticipated liftoff date for the federal funds rate in the forward-guidance language would be moved back at that meeting. Treasury yields subsequently rose further as concerns about the situation in the euro area moderated. Later in the period, Treasury yields retraced some of their earlier gains as market participants' expectations of additional policy action increased following the release of the minutes of the August FOMC meeting, the Chairman's speech at the economic symposium in Jackson Hole, and the weaker-than-expected August employment report. On net, the expected path of the federal funds rate derived from overnight index swap rates was little changed. Indicators of inflation expectations derived from nominal and inflation-protected Treasury securities edged up over the period but stayed in the ranges observed over recent quarters. Conditions in unsecured short-term dollar funding markets remained stable over the intermeeting period. In secured funding markets, conditions were also little changed. In the September Senior Credit Officer Opinion Survey on Dealer Financing Terms, respondents reported no significant changes in credit terms for important classes of counterparties over the past three months, although a few noted a slight easing in terms for some clients. The use of leverage by hedge funds was reported to have remained basically unchanged. However, respondents noted greater demand for funding of agency and non-agency residential MBS. Broad price indexes for U.S. equities rose moderately, on net, over the intermeeting period, prompted by generally better-than-expected readings on economic activity released early in the period, somewhat reduced concerns about the situation in Europe, and some additional anticipation of monetary policy easing later in the period. Option-implied volatility on the S&P 500 index fell in early August to levels not seen since the middle of 2007; it subsequently partially retraced. Equity prices for large domestic banks rose about in line with the broad equity price indexes, and credit default swap (CDS) spreads for the largest bank holding companies continued to move down. Yields on investment-grade corporate bonds were little changed at near-record low levels over the intermeeting period, while yields on speculative-grade corporate bonds edged down. The spread of yields on corporate bonds over those on comparable-maturity Treasury securities narrowed. Net debt issuance by nonfinancial firms continued to be strong over the period. Investment- and speculative-grade bond issuance increased in August from an already robust pace in preceding months, and commercial and industrial (C&I) loans rose further. In the syndicated leveraged loan market, gross issuance of institutional loans continued to be solid in July and August. Issuance of collateralized loan obligations remained on pace to post its strongest year since 2007. The rate of gross public equity issuance by nonfinancial firms increased slightly in August but was still at a subdued level. Financial conditions in the commercial real estate (CRE) market were still somewhat strained against a backdrop of weak fundamentals and tight underwriting standards. Nevertheless, issuance of commercial mortgage-backed securities continued at a solid pace over the intermeeting period. Mortgage rates remained at very low levels over the intermeeting period. Refinancing activity increased but was still restrained by tight underwriting conditions, capacity constraints at mortgage originators, and low levels of home equity. Nonrevolving consumer credit continued to expand briskly in June, largely due to robust growth in student loans originated by the federal government, while revolving credit remained subdued. Delinquency rates for consumer credit were still low, mostly reflecting a shift in lending toward higher-credit-quality borrowers. Gross issuance of long-term municipal bonds picked up in August from the subdued pace in July, but net issuance continued to decline. CDS spreads for debt issued by state governments moved lower over the intermeeting period, and the ratio of yields on long-term general obligation municipal bonds to yields on comparable-maturity Treasury securities decreased, on balance. Bank credit continued to expand at a moderate pace over the intermeeting period, as growth in C&I loans remained brisk while CRE and home equity loans both trended down further. The August Survey of Terms of Business Lending indicated that overall interest-rate spreads on C&I loans were little changed; spreads on loans drawn on recently established commitments narrowed materially, although they remained wide. M2 growth was rapid in July, likely reflecting investors' heightened demand for safe and liquid assets amid concerns about the situation in Europe, but it slowed to a moderate pace in August as those concerns eased somewhat. The monetary base rose in July and August as reserve balances and currency expanded. Sentiment improved in foreign financial markets as the European Central Bank (ECB) outlined a plan to make additional sovereign bond purchases in conjunction with the European Financial Stability Facility and the European Stability Mechanism. Spreads of shorter-term yields on peripheral euro-area sovereign bonds over those on comparable-maturity German bunds declined substantially over the period. The staff's broad nominal index of the foreign exchange value of the dollar declined and benchmark sovereign yields in the major advanced foreign economies increased as safe-haven demands eased with the lessening of concerns about the European situation. Most global benchmark indexes for equity prices moved up, and the equity prices of European banks rose sharply. Funding conditions for euro-area banks improved, although these conditions remained fragile, and draws on the Federal Reserve's liquidity swap facility with the ECB fell. The staff also reported on potential risks to financial stability, including those owing to the developments in Europe and to the current environment of low interest rates. Although the support for economic activity provided by low interest rates enhances financial stability, low interest rates also could eventually contribute to excessive borrowing or risk-taking and possibly leave some aspects of the financial system vulnerable to a future rise in interest rates. The staff surveyed a wide range of asset markets and financial institutions for signs of excessive valuations, leverage, or risk-taking that could pose systemic risks. Valuations for broad asset classes did not appear stretched, or supported by excessive leverage. The staff also did not find evidence that excessive risk-taking was widespread, although such behavior had appeared in a few smaller and less liquid markets. Staff Economic Outlook In the economic projection prepared by the staff for the September FOMC meeting, the forecast for real GDP growth in the near term was broadly similar, on balance, to the previous projection. The near-term forecast incorporated a larger negative effect of the drought on farm output in the second half of this year than the staff previously anticipated, but this effect was mostly offset by the staff's expectation of a smaller drag from net exports. The staff's medium-term projection for real GDP growth, which was conditioned on the assumption of no changes in monetary policy, was revised up a little, mostly reflecting a slight improvement in the outlook for the European situation and a somewhat higher projected path for equity prices. Nevertheless, with fiscal policy assumed to be tighter next year than this year, the staff expected that increases in real GDP would not materially exceed the growth of potential output in 2013. In 2014, economic activity was projected to accelerate gradually, supported by an easing in fiscal policy restraint, increases in consumer and business confidence, further improvements in financial conditions and credit availability, and accommodative monetary policy. The expansion in economic activity was expected to narrow the significant margin of slack in labor and product markets only slowly over the projection period, and the unemployment rate was anticipated to still be elevated at the end of 2014. The staff's near-term forecast for inflation was revised up from the projection prepared for the August FOMC meeting, reflecting increases in consumer energy prices that were greater than anticipated. However, the staff's projection for inflation over the medium term was little changed. With crude oil prices expected to gradually decline from their current levels, the boost to retail food prices from the drought anticipated to be only temporary and comparatively small, long-run inflation expectations assumed to remain stable, and substantial resource slack persisting over the projection period, the staff continued to forecast that inflation would be subdued through 2014. The staff viewed the uncertainty around the forecast for economic activity as elevated and the risks skewed to the downside, largely reflecting concerns about the situation in Europe and the possibility of a more severe tightening in U.S. fiscal policy than anticipated. Although the staff saw the outlook for inflation as uncertain, the risks were viewed as balanced and not unusually high. Participants' Views on Current Conditions and the Economic Outlook In conjunction with this FOMC meeting, meeting participants--the 7 members of the Board of Governors and the presidents of the 12 Federal Reserve Banks, all of whom participate in the deliberations of the FOMC--submitted their assessments of real output growth, the unemployment rate, inflation, and the target federal funds rate for each year from 2012 through 2015 and over the longer run, under each participants' judgment of appropriate monetary policy. The longer-run projections represent each participant's assessment of the rate to which each variable would be expected to converge, over time, under appropriate monetary policy and in the absence of further shocks to the economy. These economic projections and policy assessments are described in the Summary of Economic Projections, which is attached as an addendum to these minutes. In their discussion of the economic situation and outlook, meeting participants regarded the information received during the intermeeting period as indicating that economic activity had continued to expand at a moderate pace in recent months. However, recent gains in employment were small and the unemployment rate remained high. Although consumer spending had continued to advance, growth in business fixed investment appeared to have slowed. The housing sector showed some further signs of improvement, albeit from a depressed level. Consumer price inflation had been subdued despite recent increases in the prices of some key commodities, and longer-term inflation expectations had remained stable. Regarding the economic outlook, participants generally agreed that the pace of the economic recovery would likely remain moderate over coming quarters but would pick up over the 2013-15 period. In the near term, the drought in the Midwest was expected to weigh on economic growth. Moreover, participants observed that the pace of economic recovery would likely continue to be held down for some time by persistent headwinds, including continued weakness in the housing market, ongoing household sector deleveraging, still-tight credit conditions for some households and businesses, and fiscal consolidation at all levels of government. Many participants also noted that a high level of uncertainty regarding the European fiscal and banking crisis and the outlook for U.S. fiscal and regulatory policies was weighing on confidence, thereby restraining household and business spending. However, others questioned the role of uncertainty about policy as a factor constraining aggregate demand. In addition, participants still saw significant downside risks to the outlook for economic growth. Prominent among these risks were a possible intensification of strains in the euro zone, with potential spillovers to U.S. financial markets and institutions and thus to the broader U.S. economy; a larger-than-expected U.S. fiscal tightening; and the possibility of a further slowdown in global economic growth. A few participants, however, mentioned the possibility that economic growth could be more rapid than currently anticipated, particularly if major sources of uncertainty were resolved favorably or if faster-than-expected advances in the housing sector led to improvements in household balance sheets, increased confidence, and easier credit conditions. Participants' forecasts for economic activity, which in most cases were conditioned on an assumption of additional, near-term monetary policy accommodation, were also associated with an outlook for the unemployment rate to remain close to recent levels through 2012 and then to decline gradually toward levels judged to be consistent with the Committee's mandate. In the household sector, incoming data on retail sales were somewhat stronger than expected. Participants noted, however, that households were still in the process of deleveraging, confidence was low, and consumers appeared to remain particularly pessimistic about the prospects for the future, raising doubts that the somewhat stronger pace of spending would persist. Although the level of activity in the housing sector remained low, the somewhat faster pace of home sales and construction provided some encouraging signs of improvement. A number of participants also observed that house prices were rising. It was noted that such increases, coupled with historically low mortgage rates, could lead to a stronger upturn in housing activity, although constraints on the capacity for loan origination and still-tight credit terms for some borrowers continued to weigh on mortgage lending. Business contacts in many parts of the country were reported to be highly uncertain about the outlook for the economy and for fiscal and regulatory policies. Although firms' balance sheets were generally strong, these uncertainties had led them to be particularly cautious and to remain reluctant to hire or expand capacity. Reports on manufacturing activity were mixed, with production related to autos and housing the most notable areas of relative strength. In one District, business surveys pointed to further growth; however, readings on forward-looking indicators of orders around the country were less positive. In addition, business contacts noted that export demand was showing signs of weakness as a result of the slowdown in economic activity in Europe. The energy sector continued to expand. In the agricultural sector, high grain prices and crop insurance payments were supporting farm incomes, helping offset declines in production and reduced profits on livestock. The drought was expected to reduce farm inventories and have a transitory impact on broader measures of economic growth. Participants generally expected that fiscal policy would continue to be a drag on economic activity over coming quarters. In addition to ongoing weakness in spending at the federal, state, and local government levels, uncertainties about tax and spending policies reportedly were restraining business decisionmaking. Participants also noted that if an agreement was not reached to tackle the expiring tax cuts and scheduled spending reductions, a sharp consolidation of fiscal policy would take place at the beginning of 2013. The available indicators pointed to continued weakness in overall labor market conditions. Growth in employment had been disappointing, with the average monthly increases in payrolls so far this year below last year's pace and below the pace that would be required to make significant progress in reducing the unemployment rate. The unemployment rate declined around the turn of the year but had not fallen significantly since then. In addition, the labor force participation rate and employment-to-population ratios were at or near post-recession lows. Meeting participants again discussed the extent of slack in labor markets. A few participants reiterated their view that the persistently high level of unemployment reflected the effect of structural factors, including mismatches across and within sectors between the skills of the unemployed and those demanded in sectors in which jobs were currently available. It was also suggested that there was an ongoing process of polarization in the labor market, with the share of job opportunities in middle-skill occupations continuing to decline while the shares of low and high skill occupations increased. Both of these views would suggest a lower level of potential output and thus reduced scope for combating unemployment with additional monetary policy stimulus. Several participants, while acknowledging some evidence of structural changes in the labor market, stated again that weak aggregate demand was the principal reason for the high unemployment rate. They saw slack in resource utilization as remaining wide, indicating an important role for additional policy accommodation. Several participants noted the risk that continued high levels of unemployment, even if initially cyclical, might ultimately induce adverse structural changes. In particular, they expressed concerns about the risk that the exceptionally high level of long-term unemployment and the depressed level of labor participation could ultimately lead to permanent negative effects on the skills and prospects of those without jobs, thereby reducing the longer-run normal level of employment and potential output. Sentiment in financial markets improved notably during the intermeeting period. Participants indicated that recent decisions by the ECB helped ease investors' anxiety about the near-term prospects for the euro. However, participants also observed that significant risks related to the euro-area banking and fiscal crisis remained, and that a number of important issues would have to be resolved in order to achieve further progress toward a comprehensive solution to the crisis. Participants noted that indicators of financial stress in the United States were not especially high and overall conditions in U.S. financial markets remained favorable. Longer-term interest rates were low and supportive of economic growth, while equity prices had risen. One participant noted that, while there were few current signs of excessive risk-taking, low interest rates could ultimately lead to financial imbalances that would be challenging to detect before they became serious problems. The incoming information on inflation over the intermeeting period was largely in line with participants' expectations. Despite recent increases in the prices of some key commodities, consumer price inflation remained subdued. With longer-term inflation expectations stable and the unemployment rate elevated, participants generally anticipated that inflation over the medium run would likely run at or below the 2 percent rate that the Committee judges to be most consistent with its mandate. Most participants saw the risks to the outlook for inflation as roughly balanced. A few participants felt that maintaining a highly accommodative stance of monetary policy over an extended period could unmoor longer-term inflation expectations and, against a backdrop of higher energy and commodity prices, posed upside risks to inflation. Other participants, by contrast, saw inflation risks as tilted to the downside, given their expectations for sizable and persistent resource slack. Participants again exchanged views on the likely benefits and costs of a new large-scale asset purchase program. Many participants anticipated that such a program would provide support to the economic recovery by putting downward pressure on longer-term interest rates and promoting more accommodative financial conditions. A number of participants also indicated that it could lift consumer and business confidence by emphasizing the Committee's commitment to continued progress toward its dual mandate. In addition, it was noted that additional purchases could reinforce the Committee's forward guidance regarding the federal funds rate. Participants discussed the effectiveness of purchases of Treasury securities relative to purchases of agency MBS in easing financial conditions. Some participants suggested that, all else being equal, MBS purchases could be preferable because they would more directly support the housing sector, which remains weak but has shown some signs of improvement of late. One participant, however, objected that purchases of MBS, when compared to purchases of longer-term Treasury securities, would likely result in higher interest rates for many borrowers in other sectors. A number of participants highlighted the uncertainty about the overall effects of additional purchases on financial markets and the real economy. Some participants thought past purchases were useful because they were conducted during periods of market stress or heightened deflation risk and were less confident of the efficacy of additional purchases under present circumstances. A few expressed skepticism that additional policy accommodation could help spur an economy that they saw as held back by uncertainties and a range of structural issues. In discussing the costs and risks that such a program might entail, several participants reiterated their concern that additional purchases might complicate the Committee's efforts to withdraw monetary policy accommodation when it eventually became appropriate to do so, raising the risk of undesirably high inflation in the future and potentially unmooring inflation expectations. One participant noted that an extended period of accommodation resulting from additional asset purchases could lead to excessive risk-taking on the part of some investors and so undermine financial stability over time. The possible adverse effects of large purchases on market functioning were also noted. However, most participants thought these risks could be managed since the Committee could make adjustments to its purchases, as needed, in response to economic developments or to changes in its assessment of their efficacy and costs. Participants also discussed issues related to the provision of forward guidance regarding the future path of the federal funds rate. It was noted that clear communication and credibility allow the central bank to help shape the public's expectations about policy, which is crucial to managing monetary policy when the federal funds rate is at its effective lower bound. A number of participants questioned the effectiveness of continuing to use a calendar date to provide forward guidance, noting that a change in the calendar date might be interpreted pessimistically as a downgrade of the Committee's economic outlook rather than as conveying the Committee's determination to support the economic recovery. If the public interpreted the statement pessimistically, consumer and business confidence could fall rather than rise. Many participants indicated a preference for replacing the calendar date with language describing the economic factors that the Committee would consider in deciding to raise its target for the federal funds rate. Participants discussed the benefits of such an approach, including the potential for enhanced effectiveness of policy through greater clarity regarding the Committee's future behavior. That approach could also bolster the stimulus provided by the System's holdings of longer-term securities. It was noted that forward guidance along these lines would allow market expectations regarding the federal funds rate to adjust automatically in response to incoming data on the economy. Many participants thought that more-effective forward guidance could be provided by specifying numerical thresholds for labor market and inflation indicators that would be consistent with maintaining the federal funds rate at exceptionally low levels. However, reaching agreement on specific thresholds could be challenging given the diversity of participants' views, and some were reluctant to specify explicit numerical thresholds out of concern that such thresholds would necessarily be too simple to fully capture the complexities of the economy and the policy process or could be incorrectly interpreted as triggers prompting an automatic policy response. In addition, numerical thresholds could be confused with the Committee's longer-term objectives, and so undermine the Committee's credibility. At the conclusion of the discussion, most participants agreed that the use of numerical thresholds could be useful to provide more clarity about the conditionality of the forward guidance but thought that further work would be needed to address the related communications challenges. Committee Policy Action Committee members saw the information received over the intermeeting period as suggesting that economic activity had continued to expand at a moderate pace in recent months. However, growth in employment had been slow, and almost all members saw the unemployment rate as still elevated relative to levels that they viewed as consistent with the Committee's mandate. Members generally judged that without additional policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Moreover, while the sovereign and banking crisis in Europe had eased some recently, members still saw strains in global financial conditions as posing significant downside risks to the economic outlook. The possibility of a larger-than-expected fiscal tightening in the United States and slower global growth were also seen as downside risks. Inflation had been subdued, even though the prices of some key commodities had increased recently. Members generally continued to anticipate that, with longer-term inflation expectations stable and given the existing slack in resource utilization, inflation over the medium term would run at or below the Committee's longer-run objective of 2 percent. In their discussion of monetary policy for the period ahead, members generally expressed concerns about the slow pace of improvement in labor market conditions and all members but one agreed that the outlook for economic activity and inflation called for additional monetary accommodation. Members agreed that such accommodation should be provided through both a strengthening of the forward guidance regarding the federal funds rate and purchases of additional agency MBS at a pace of $40 billion per month. Along with the ongoing purchases of $45 billion per month of longer-term Treasury securities under the maturity extension program announced in June, these purchases will increase the Committee's holdings of longer-term securities by about $85 billion each month through the end of the year, and should put downward pressure on longer-term interest rates, support mortgage markets, and help make broader financial conditions more accommodative. Members also agreed to maintain the Committee's existing policy of reinvesting principal payments from its holdings of agency debt and agency MBS into agency MBS. The Committee agreed that it would closely monitor incoming information on economic and financial developments in coming months, and that if the outlook for the labor market did not improve substantially, it would continue its purchases of agency MBS, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability. This flexible approach was seen as allowing the Committee to tailor its policy response over time to incoming information while incorporating conditional features that clarified the Committee's intention to improve labor market conditions, thereby enhancing the effectiveness of the action by helping to bolster business and consumer confidence. While members generally viewed the potential risks associated with these purchases as manageable, the Committee agreed that in determining the size, pace, and composition of its asset purchases, it would, as always, take appropriate account of the likely efficacy and costs of such purchases. With regard to the forward guidance, the Committee agreed on an extension through mid-2015, in conjunction with language in the statement indicating that it expects that a highly accommodative stance of policy will remain appropriate for a considerable time after the economic recovery strengthens. That new language was meant to clarify that the maintenance of a very low federal funds rate over that period did not reflect an expectation that the economy would remain weak, but rather reflected the Committee's intention to support a stronger economic recovery. One member dissented from the policy decision, on the grounds that he opposed additional asset purchases and preferred to omit the calendar date from the forward guidance; in his view, it would be better to use qualitative language to describe the factors that would influence the Committee's decision to increase the target federal funds rate. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to continue the maturity extension program it announced in June to purchase Treasury securities with remaining maturities of 6 years to 30 years with a total face value of about $267 billion by the end of December 2012, and to sell or redeem Treasury securities with remaining maturities of approximately 3 years or less with a total face value of about $267 billion. For the duration of this program, the Committee directs the Desk to suspend its policy of rolling over maturing Treasury securities into new issues. The Committee directs the Desk to maintain its existing policy of reinvesting principal payments on all agency debt and agency mortgage-backed securities in the System Open Market Account in agency mortgage-backed securities. The Desk is also directed to begin purchasing agency mortgage-backed securities at a pace of about $40 billion per month. The Committee directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability." The vote encompassed approval of the statement below to be released at 12:30 p.m.: "Information received since the Federal Open Market Committee met in August suggests that economic activity has continued to expand at a moderate pace in recent months. Growth in employment has been slow, and the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment appears to have slowed. The housing sector has shown some further signs of improvement, albeit from a depressed level. Inflation has been subdued, although the prices of some key commodities have increased recently. Longer-term inflation expectations have remained stable. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely would run at or below its 2 percent objective. To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee's holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative. The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases. To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015." Voting for this action: Ben Bernanke, William C. Dudley, Elizabeth Duke, Dennis P. Lockhart, Sandra Pianalto, Jerome H. Powell, Sarah Bloom Raskin, Jeremy C. Stein, Daniel K. Tarullo, John C. Williams, and Janet L. Yellen. Voting against this action: Jeffrey M. Lacker. Mr. Lacker dissented because he believed that additional monetary stimulus at this time was unlikely to result in a discernible improvement in economic growth without also causing an unwanted increase in inflation. Moreover, he expressed his opposition to the purchase of more MBS, because he viewed it as inappropriate for the Committee to choose a particular sector of the economy to support; purchases of Treasury securities instead would have avoided this effect. Finally, he preferred to omit the description of the time period over which exceptionally low levels for the federal funds rate were likely to be warranted. Consensus Forecast Experiment In light of the discussion at the previous FOMC meeting, the subcommittee on communications developed a second experimental exercise intended to shed light on the feasibility and desirability of constructing an FOMC consensus forecast. At this meeting, participants discussed possible formulations of the monetary policy assumptions on which to condition an FOMC consensus forecast and alternative approaches for participants to express their endorsement of the consensus forecast. In conclusion, participants agreed to have a broad discussion of the experiences gathered from the two experimental exercises in conjunction with the October FOMC meeting. It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, October 23-24, 2012. The meeting adjourned at 12:10 p.m. on September 13, 2012. Notation Vote By notation vote completed on August 21, 2012, the Committee unanimously approved the minutes of the FOMC meeting held on July 31-August 1, 2012. _____________________________ William B. English Secretary 1. Attended Wednesday's session only. Return to text 2. Attended Thursday's session only. Return to text 3. Attended after the discussion on potential effects of a large-scale asset purchase program. Return to text 4. Attended the discussion on potential effects of a large-scale asset purchase program. Return to text

2012-08-22

Minute

Minutes of the Federal Open Market Committee July 31 - August 1, 2012 A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, July 31, 2012, at 1:00 p.m. and continued on Wednesday, August 1, 2012, at 9:00 a.m. PRESENT: Ben Bernanke, Chairman William C. Dudley, Vice Chairman Elizabeth Duke Jeffrey M. Lacker Dennis P. Lockhart Sandra Pianalto Jerome H. Powell Sarah Bloom Raskin Jeremy C. Stein Daniel K. Tarullo John C. Williams Janet L. Yellen James Bullard, Christine Cumming, Charles L. Evans, Esther L. George, and Eric Rosengren, Alternate Members of the Federal Open Market Committee Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, Presidents of the Federal Reserve Banks of Dallas, Minneapolis, and Philadelphia, respectively William B. English, Secretary and Economist Deborah J. Danker, Deputy Secretary Matthew M. Luecke, Assistant Secretary David W. Skidmore, Assistant Secretary Michelle A. Smith, Assistant Secretary Scott G. Alvarez, General Counsel Thomas C. Baxter, Deputy General Counsel Steven B. Kamin, Economist David W. Wilcox, Economist David Altig, Thomas A. Connors, Michael P. Leahy, James J. McAndrews, William Nelson, David Reifschneider, William Wascher, Associate Economists Simon Potter, Manager, System Open Market Account Michael S. Gibson, Director, Division of Banking Supervision and Regulation, Board of Governors Nellie Liang, Director, Office of Financial Stability Policy and Research, Board of Governors Jon W. Faust and Andrew T. Levin, Special Advisors to the Board, Office of Board Members, Board of Governors James A. Clouse, Deputy Director, Division of Monetary Affairs, Board of Governors Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors Seth B. Carpenter, Senior Associate Director, Division of Monetary Affairs, Board of Governors Thomas Laubach, Senior Adviser, Division of Research and Statistics, Board of Governors; Joyce K. Zickler, Senior Adviser, Division of Monetary Affairs, Board of Governors Michael T. Kiley and David E. Lebow, Associate Directors, Division of Research and Statistics, Board of Governors Karen M. Pence, Assistant Director, Division of Research and Statistics, Board of Governors David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors Elizabeth Klee, Senior Economist, Division of Monetary Affairs, Board of Governors; Robert J. Tetlow, Senior Economist, Division of Research and Statistics, Board of Governors David A. Sapenaro, First Vice President, Federal Reserve Bank of St. Louis Jeff Fuhrer and Daniel G. Sullivan, Executive Vice Presidents, Federal Reserve Banks of Boston and Chicago, respectively Troy Davig and Christopher J. Waller, Senior Vice Presidents, Federal Reserve Banks of Kansas City and St. Louis, respectively Reuven Glick, Group Vice President, Federal Reserve Bank of San Francisco Todd E. Clark, Lorie K. Logan, Keith Sill, and Mark A. Wynne, Vice Presidents, Federal Reserve Banks of Cleveland, New York, Philadelphia, and Dallas, respectively Robert L. Hetzel and Samuel Schulhofer-Wohl, Senior Economists, Federal Reserve Banks of Richmond and Minneapolis, respectively Simple Rules for Monetary Policy A staff presentation summarized research on the efficacy of alternative simple monetary policy rules in fostering the Federal Reserve's monetary policy objectives of maximum employment and price stability. The presentation reviewed the characteristics of a variety of rules and noted a number of reasons why current conditions might warrant deviating from the prescriptions of simple rules designed for more normal times. The presentation also discussed how simple rules might be used as part of a comprehensive policy framework to provide clear and transparent benchmarks for monetary policy decisionmaking and the possibility that such rules could be helpful in communicating the connection between policy choices and the Federal Open Market Committee's (FOMC) objectives. Meeting participants expressed a range of views regarding the appropriate role of policy rules in monetary policy decisionmaking. A number of participants indicated that such rules have played a useful role in informing the Committee's monetary policy deliberations. However, several participants pointed to specific considerations--including the possible mismeasurement of unobservable variables, such as potential output, and uncertainty about the appropriate economic models to use in estimating the magnitude of those variables--that might limit the usefulness of simple rules both internally and in public communications. Several participants saw value in examining the performance of rules across a range of economic models. Participants discussed the case for making adjustments to the prescriptions of simple policy rules in the current circumstances to take into account various considerations such as the effective lower bound for the federal funds rate, the effects of the Committee's balance sheet policies, and potential shifts in the dynamics of the economy. Some participants noted that adjustment of standard policy rules for balance sheet policies would tend to push up the federal funds rate prescription, while a number of participants indicated that other factors related to current circumstances may warrant maintaining an accommodative stance of policy for longer than would be prescribed by standard rules. With regard to the latter, some participants suggested that inertial policy rules--that is, rules under which any movements in the stance of policy tend to be fairly persistent--would be most appropriate in the current context. Developments in Financial Markets and the Federal Reserve's Balance Sheet The Manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets during the period since the FOMC met on June 19-20, 2012. He also reported on System open market operations, including the ongoing reinvestment into agency-guaranteed mortgage-backed securities (MBS) of principal payments received on SOMA holdings of agency debt and agency-guaranteed MBS as well as the operations related to the continuation of the maturity extension program authorized at the June 19-20, 2012, FOMC meeting. His report included a summary of analysis prepared by the staff on the potential implications of the size and composition of the Federal Reserve's securities portfolio for private- sector holdings of Treasury securities and agency MBS and for trading conditions in markets related to these securities. The Manager also reported on recent developments in European money markets and implications for the yields on the euro-denominated assets that the Federal Reserve holds in its foreign exchange reserves. By unanimous vote, the Committee ratified the Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account over the intermeeting period. Staff Review of the Economic Situation The information reviewed at the July 31-August 1 meeting indicated that economic activity increased at a slower pace in the second quarter than earlier in the year and that labor market conditions had improved little in recent months. In addition, revised data for 2009 through 2011 from the Bureau of Economic Analysis indicated that the recession had been slightly less deep and the early part of the subsequent recovery had been a bit more gradual than previously thought, leaving the level of real gross domestic product (GDP) at the end of last year essentially the same as estimated earlier. In the second quarter, consumer price inflation was markedly lower than in the first quarter, mostly reflecting substantial declines in consumer energy prices, while measures of longer-run inflation expectations remained stable. Private nonfarm employment expanded in June at about the same modest pace as in the second quarter as a whole, and government employment decreased slightly. The unemployment rate was 8.2 percent in June, the same as its average during the first half of the year. The rate of long-duration unemployment stayed elevated, and the share of workers employed part time for economic reasons was still high. Indicators of job openings and firms' hiring plans were generally subdued. While initial claims for unemployment insurance trended down a bit over the intermeeting period, they remained at a level consistent with continued modest increases in employment in the coming months. Manufacturing production decelerated significantly in the second quarter following a large gain in the first quarter, while the rate of manufacturing capacity utilization was unchanged on balance. The production of motor vehicles and parts increased considerably last quarter, but factory output outside of the motor vehicle sector was essentially flat. Automakers' schedules indicated that the pace of motor vehicle assemblies in the third quarter would be about the same as in the second quarter. Broader indicators of manufacturing output, such as the diffusion indexes of new orders from the national and regional manufacturing surveys, declined in recent months and were at levels consistent with only muted increases in production in the near term. Real personal consumption expenditures increased at a slower rate in the second quarter than in the first quarter, primarily reflecting a decrease in spending for motor vehicles. Meanwhile, real disposable personal income rose at a faster pace than consumer spending in both the first and second quarters, boosted in part in recent months by lower energy prices. Consumer sentiment as measured by the Thomson Reuters/University of Michigan Surveys of Consumers (Michigan Survey) was more downbeat in June and July than earlier in the year. Conditions in the housing market generally improved further in recent months, but activity remained at a low level against the backdrop of the large inventory of foreclosed and distressed properties and tight underwriting standards for mortgage loans. Both starts and permits of new single-family homes increased in the second quarter. Starts of new multifamily units were about the same last quarter as in the previous quarter, but permits rose, which pointed to higher multifamily construction in the coming months. Home prices increased in May for the fifth consecutive month. Sales of new homes in the second quarter were moderately higher than in the first quarter, but existing home sales decreased slightly. Real business expenditures on equipment and software rose in the second quarter at a faster pace than in the first quarter. However, new orders for nondefense capital goods excluding aircraft decreased last quarter, and the backlog of unfilled orders decelerated sharply. Other recent forward-looking indicators, such as surveys of business conditions and capital spending plans, also suggested that increases in outlays for business equipment would slow in coming months. Real business spending for nonresidential construction increased somewhat in the second quarter but remained at a relatively low level. Meanwhile, business inventories generally appeared to be relatively well aligned with sales. Real federal government purchases decreased a little in the second quarter, following a much sharper decline in the previous three quarters, as the continued contraction in defense spending eased. Real state and local government purchases continued to contract at a moderate rate last quarter. The U.S. international trade deficit narrowed in May, as exports edged up and imports declined. The increase in exports primarily reflected higher exports of services and agricultural products. The decrease in imports was the result of a decline in oil imports, as both the price and the quantity of oil imports fell. Imports of consumer goods and industrial supplies also moved down, but imports of capital goods and automotive products increased. Based on an estimate of the trade data for June, the advance release of the national income and product accounts showed that real net exports of goods and services made a small negative arithmetic contribution to the increase in U.S. real GDP in the second quarter. Overall U.S. consumer prices increased at a slower pace in the second quarter than in the first. Consumer energy prices declined significantly last quarter, and survey data indicated that gasoline prices fell somewhat further in the first few weeks of July. Meanwhile, consumer food prices posted only a small increase last quarter, but the recent sizable run-up in spot and futures prices of farm commodities, reflecting the effects of the drought and hot weather in the midwestern part of the United States, pointed to some temporary upward pressures on retail food prices later this year. Consumer prices excluding food and energy increased more moderately in the second quarter than in the first. Near-term inflation expectations from the Michigan Survey rose a little in June and July, while longer-term inflation expectations in the survey continued to be stable. Available measures of labor compensation indicated that nominal wage gains remained restrained. The employment cost index rose at a modest pace again in the second quarter. Average hourly earnings for all employees also increased at a relatively slow rate last quarter. Foreign economic growth continued to be subdued, as fiscal retrenchment and financial stresses in the euro area continued to weigh on economic activity in Europe and elsewhere. Recent indicators of production and confidence in the euro area remained weak, and the preliminary second-quarter estimate of real GDP in the United Kingdom showed a contraction. Real GDP in China accelerated somewhat in the second quarter following a relatively weak expansion in the first quarter, and recent monthly data suggested some further improvement. However, data for other emerging market economies generally pointed to a deceleration in economic activity last quarter. Foreign inflation eased in the second quarter and remains well contained, as earlier declines in the prices of energy and other commodities passed through to the retail level. Staff Review of the Financial Situation Several factors influenced developments in financial markets since the time of the June FOMC meeting. Generally weaker-than-expected economic data in the United States, concerns about the fiscal and banking situation in the euro area, and the outlook for global economic growth weighed on investor sentiment. However, the effects of these factors were offset to some extent by actual and expected easing of monetary policy in the United States and abroad and by better-than-anticipated profits at some S&P 500 firms. Interest rates generally moved down, on net, over the intermeeting period. The yield on nominal 10-year Treasury securities declined to a historically low level, partly due to a lower expected path of the federal funds rate, the continuation of the maturity extension program announced at the June FOMC meeting, and perceptions of an increased likelihood that the Federal Reserve will ease monetary policy further. In addition, persistent concerns about euro-area developments were reportedly associated with increased safe-haven demands that contributed to the decline in Treasury yields. Anecdotal reports suggested that the decrease in shorter-term yields may also have reflected somewhat increased expectations that the Federal Reserve would reduce the interest rate paid on reserve balances in coming months. Near-term indicators of inflation expectations derived from nominal and inflation-protected Treasury securities fell modestly despite an increase in some commodity prices; such indicators changed little at longer horizons. The expected path for the federal funds rate derived from money market futures quotes shifted down. Conditions in short-term unsecured dollar funding markets remained stable over the intermeeting period, although most peripheral euro-area institutions continued to have little, if any, access to such markets. In secured funding markets, Treasury general collateral repurchase agreement rates rose slightly on balance. Broad indexes of U.S. equity prices rose somewhat, on net, over the intermeeting period, with significant gains prompted in part by comments from European officials that apparently raised investor expectations for near-term European policy actions. Option-implied volatility on the S&P 500 index rose slightly. Stock prices for the large domestic bank holding companies posted mixed changes over the period, and credit default swap (CDS) spreads for those firms generally moved lower on net. Yields on investment- and speculative-grade corporate bonds fell further over the intermeeting period, approaching record lows. Their spreads relative to comparable-maturity Treasury securities narrowed but were still above their average levels prior to the financial crisis. Nonfinancial firms continued to issue debt at a strong pace over the period. Gross investment-grade corporate bond issuance remained robust in June and July, while the volume of nonfinancial commercial paper outstanding rose early in the second quarter but decreased slightly in June. Commercial and industrial (C&I) loans advanced further over the intermeeting period. Issuance in the syndicated leveraged loan market remained solid in the second quarter; terms and structures of new leveraged loan deals reportedly loosened modestly on the margin. Gross public equity issuance by nonfinancial firms was anemic in June and July. Financial conditions in the commercial real estate market remained somewhat strained against a backdrop of weak fundamentals and still-tight underwriting. That said, issuance of commercial mortgage-backed securities picked up in the second quarter. Despite new historical lows for residential mortgage rates over the intermeeting period, refinancing activity remained relatively muted. Evidence from the Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS) conducted in July indicated that mortgage underwriting standards at banks generally have not eased much from their tightest post-crisis levels. Consumer credit expanded further in May as a result of rapid increases in student loans and, to a lesser extent, auto loans. Delinquency rates for consumer credit remained low, likely in part because of a compositional shift of credit supply over the past few years toward the least-risky borrowers. Gross issuance of long-term municipal bonds was robust in June and July. Net issuance of long-term bonds turned positive in the second quarter after staying in negative territory for much of the past year. Yields on long-term general obligation municipal bonds generally followed Treasury yields lower, while default rates remained very low and CDS spreads for states were roughly unchanged on net. Bank credit and total loans continued to expand modestly in the second quarter, largely because of the further robust increase in C&I loans. The gradual expansion in total loans was broadly consistent with the July SLOOS, in which domestic banks generally indicated that demand strengthened for many types of loans in the second quarter and that lending standards eased somewhat, on balance, across most major loan categories. The staff's broad nominal index for the foreign exchange value of the dollar changed little, on net, over the intermeeting period, although the dollar appreciated against the euro. Financial markets in the euro area were volatile, as a deterioration in market sentiment gave way to periods of optimism following the euro-area summit in late June, the decision by the European Central Bank (ECB) to ease policy in early July, and indications from the ECB later in July that the central bank might take further steps to support the monetary union. On net, European stock markets finished the period higher. Yield spreads on Spanish and Italian 10-year bonds over their German equivalents, which rose sharply over most of July, fell back from their intermeeting peaks but remained elevated. Several foreign central banks eased monetary policy over the intermeeting period. The ECB cut its benchmark policy rate by 25 basis points and reduced the rate on its overnight deposit facility to zero. The Bank of England increased the size of its asset purchase program and announced details on its new program designed to boost bank lending to the nonfinancial sector. The central banks of Brazil, China, and South Korea all reduced official rates as well. Amid policy easing in the euro area and United Kingdom, yields on German and U.K. sovereign bonds declined, with two-year German sovereign bonds trading at yields below zero. Staff Economic Outlook In the economic forecast prepared by the staff for the July 31-August 1 FOMC meeting, the near-term projection for real GDP growth was revised down somewhat. The revision primarily reflected a slower pace of consumer spending than the staff expected at the time of the previous projection, along with a deterioration in some forward-looking indicators. However, the staff's medium-term forecast for real GDP growth was little changed, as the slightly weaker underlying pace of economic activity suggested by the recent data was roughly offset by the anticipated effects of the continuation of the maturity extension program announced following the June FOMC meeting, which had not been incorporated in the previous projection. With the restraint from fiscal policy assumed to increase next year, the staff projected that increases in real GDP would not significantly exceed the growth rate of potential output in 2013. Thereafter, economic activity was expected to accelerate gradually, supported by an eventual easing in fiscal policy restraint, gains in consumer and business sentiment, further improvements in credit conditions, and continued accommodative monetary policy. The expansion in economic activity was anticipated to reduce the substantial margin of slack in labor and product markets only slowly over the projection period, and the unemployment rate was expected to remain elevated at the end of 2014. The staff's forecast for inflation was little changed from the projection prepared for the June FOMC meeting. With crude oil prices expected to decline a bit from their current levels, the boost to retail food prices from the current drought in the Midwest anticipated to be only temporary and relatively small, longer-run inflation expectations remaining stable, and substantial resource slack persisting over the forecast period, the staff continued to project that inflation would be subdued through 2014. Participants' Views on Current Conditions and the Economic Outlook In their discussion of the economic situation and the outlook, meeting participants agreed that the information received since the Committee met in June suggested that economic activity had decelerated in recent months to a slower pace than they had anticipated. Although business investment had continued to advance, consumer spending had slowed considerably since earlier in the year. Conditions in the housing sector appeared to have improved somewhat, but from a very low level. Indicators of manufacturing activity had softened. Recent monthly gains in payroll employment had continued to be small, and the unemployment rate in June remained at an elevated level. Consumer price inflation had been low in recent months, as declines in the costs of crude oil were passed through to retail energy prices. Longer-term inflation expectations had remained stable. Regarding the economic outlook, most participants agreed that economic growth was likely to remain moderate over coming quarters and then pick up gradually. However, some participants indicated that they had lowered their near-term forecasts for economic growth in light of the weaker-than-expected increases in consumer spending and employment in recent months. In addition, some participants expressed concern about the persistent headwinds restraining the pace of the recovery, including the weak housing sector, still-tight borrowing conditions for some households and firms, and fiscal restraint at all levels of government. Many participants judged that a high level of uncertainty about possible spillovers from the fiscal and banking strains in the euro area and about the outlook for U.S. fiscal or regulatory policies was holding back household and business spending.  And they saw the possibilities of an intensification of strains in the euro area and of a sharper-than-anticipated U.S. fiscal consolidation as significant downside risks to the economic outlook. Although participants generally agreed that improvements in recent years in the capital and liquidity of financial institutions and in the strength of household and business balance sheets have increased the resilience of the economy, some were concerned that at its current pace, the recovery was still vulnerable to adverse shocks. Given participants' forecasts of economic activity, they generally anticipated that the unemployment rate would decline only slowly toward levels that participants judge to be consistent with the Committee's mandate. Participants' assessments of the outlook for inflation were largely unchanged from those reported in June. Smoothing through the effects of fluctuations in food and energy prices, participants anticipated that inflation over the medium term would remain at or below the Committee's 2 percent longer-run objective. Meeting participants again exchanged views on the extent of slack in labor and product markets. A number of participants expressed the view that structural changes in the labor market were not sufficient to explain the high level of unemployment. Those participants saw substantial slack in resource utilization and hence continued to judge that inflation was likely to remain subdued over the medium term as the economy continued to recover. However, several other participants interpreted the moderate pace of the recovery as pointing to a more substantial markdown in the trajectory of potential output. In particular, a couple of participants noted that they would have expected inflation to have fallen more in recent years if the output gap had been as substantial as some measures suggested. One participant posited that the sharp decline in net worth and reduced credit availability in recent years not only weighed on aggregate demand, but also reduced aggregate supply by hampering new business formation and product innovation; another participant cited evidence that structural unemployment was elevated as a result of mismatches between the skills demanded by employers and those of the long-duration unemployed. In discussing developments in the household sector, many participants noted the recent deceleration in overall consumer spending, although a couple cited new autos and tourism as areas of relative strength. Participants saw several factors as likely contributing to slower consumer spending, including the weakness in earned income and a high level of uncertainty among households about the economic outlook. Several pointed out that while households had made considerable progress in reducing their debt and rebuilding their savings, the deleveraging process was still ongoing, the level of housing debt remained high, and a significant number of mortgage borrowers continued to be underwater on their loans. Home sales and construction were generally viewed as gradually improving, supported in part by historically low mortgage interest rates. Many participants reported that house prices in their Districts were rising or had bottomed out, and several noted that their contacts saw signs of progress in reducing the overhang of unsold properties. However, it was noted that the reduction in inventories should be viewed cautiously because owners who are underwater on their mortgages may be withholding their homes from the market, implying a substantial "shadow" inventory. Regarding the business sector, many participants reported that, with the exception of motor vehicle production, manufacturing activity in their Districts was slow or had declined in recent months. Nonetheless, forward-looking surveys of orders and manufacturing production in a couple of Districts were more positive. Energy-related activity continued to expand, and investment projects in that sector were reported to be moving forward. However, contacts in several Districts indicated that export demand had weakened as a result of the slowdown in economic activity in Europe; Asia; and some emerging market countries, including China. More generally, some participants reported that their business contacts regarded the economic outlook to be highly uncertain, in part due to unresolved fiscal and regulatory matters. Although several participants noted that the uncertainty had not led businesses in their Districts to reduce payrolls or cut back spending, others cited reports of shortfalls from business plans that could lead to cost-cutting, of restructuring to position firms for leaner operations, or even of postponed investment and hiring.  Two participants provided an update on the situation in the agricultural sector in light of the drought in the Midwest:  With crop yields projected to be down markedly and prices rising, livestock producers appeared likely to suffer losses as a result of higher input costs while crop producers would need to rely on higher prices and crop insurance to stabilize their income. The incoming information on inflation over the intermeeting period was largely in line with participants' expectations.  Consumer prices had decelerated as a result of the pass-through of lower crude oil costs to retail prices of gasoline and fuel oil. Crude oil prices had turned up again more recently, but one participant noted that global inventories of oil were elevated and, with world demand easing, prices should be restrained going forward. Participants acknowledged that the drought would likely result in a temporary run-up in consumer food prices later this year. Nonetheless, inflation was expected to remain subdued, on balance, over coming quarters. In explaining that outlook, participants cited the lack of upward pressure from labor costs and prices of imported commodities as well as the stability of inflation expectations. A couple of participants referred to information from business contacts suggesting that inflation was unlikely to decline further, and a few expressed concerns that maintaining a highly accommodative stance of monetary policy for an extended period could erode the stability of inflation expectations over time and hence posed upside risks to the inflation outlook. Financial markets remained sensitive to ongoing developments related to the sovereign debt and banking situation in the euro area, and participants continued to view the possibility of an intensification of strains in global financial markets as a significant downside risk to the domestic economic outlook. Several participants indicated that recent trends in euro-area equity indexes and sovereign debt yields had not been encouraging, and some noted that the uncertainty prevailing in global financial markets was showing through in a cautious posture of investors. Nonetheless, participants generally agreed that conditions in domestic credit markets remained more favorable than they were a year ago. One participant pointed out that credit risk spreads--while still above pre-recession norms--may have been boosted by safe-haven demands for Treasury securities and indicated that broader financial market conditions seemed reasonably accommodative. Banks were reported to be seeing an increase in their residential mortgage business along with a continued rise in C&I lending, especially to large firms; consumer credit was also increasing. Participants discussed a number of policy tools that the Committee might employ if it decided to provide additional monetary accommodation to support a stronger economic recovery in a context of price stability. One of the policy options discussed was an extension of the period over which the Committee expected to maintain its target range for the federal funds rate at 0 to 1/4 percent. It was noted that such an extension might be particularly effective if done in conjunction with a statement indicating that a highly accommodative stance of monetary policy was likely to be maintained even as the recovery progressed. Given the uncertainty attending the economic outlook, a few participants questioned whether the conditionality of the forward guidance was sufficiently clear, and they suggested that the Committee should consider replacing the calendar date with guidance that was linked more directly to the economic factors that the Committee would consider in deciding to raise its target for the federal funds rate, or omit the forward guidance language entirely. Participants also exchanged views on the likely benefits and costs of a new large-scale asset purchase program. Many participants expected that such a program could provide additional support for the economic recovery both by putting downward pressure on longer-term interest rates and by contributing to easier financial conditions more broadly. In addition, some participants noted that a new program might boost business and consumer confidence and reinforce the Committee's commitment to making sustained progress toward its mandated objectives. Participants also discussed the merits of purchases of Treasury securities relative to agency MBS. However, others questioned the possible efficacy of such a program under present circumstances, and a couple suggested that the effects on economic activity might be transitory. In reviewing the costs that such a program might entail, some participants expressed concerns about the effects of additional asset purchases on trading conditions in markets related to Treasury securities and agency MBS, but others agreed with the staff's analysis showing substantial capacity for additional purchases without disrupting market functioning. Several worried that additional purchases might alter the process of normalizing the Federal Reserve's balance sheet when the time came to begin removing accommodation. A few participants were concerned that an extended period of accommodation or an additional large-scale asset purchase program could increase the risks to financial stability or lead to a rise in longer-term inflation expectations. Many participants indicated that any new purchase program should be sufficiently flexible to allow adjustments, as needed, in response to economic developments or to changes in the Committee's assessment of the efficacy and costs of the program. Some participants commented on other possible tools for adding policy accommodation, including a reduction in the interest rate paid on required and excess reserve balances. While a couple of participants favored such a reduction, several others raised concerns about possible adverse effects on money markets. It was noted that the ECB's recent cut in its deposit rate to zero provided an opportunity to learn more about the possible consequences for market functioning of such a move. In light of the Bank of England's Funding for Lending Scheme, a couple of participants expressed interest in exploring possible programs aimed at encouraging bank lending to households and firms, although the importance of institutional differences between the two countries was noted. Committee Policy Action The information received over the intermeeting period indicated that economic activity had decelerated in recent months, with a notable slowing in consumer spending. Employment gains continued to be modest, and the unemployment rate was unchanged at a level that almost all members saw as elevated relative to levels consistent with the Committee's mandate. Inflation had declined from its rate earlier in the year, mainly reflecting lower prices of crude oil and gasoline, and inflation expectations had been stable. Members generally expected that economic growth would be moderate over coming quarters and then would pick up very gradually. While most members did not view the    medium-run economic outlook as having changed significantly since the June meeting, several noted that they had lowered their expectations for economic growth over coming quarters. Furthermore, members generally attached an unusually high level of uncertainty to their assessments of the economic outlook and continued to judge that the risks to economic growth were tilted to the downside because of strains in financial markets stemming from the sovereign debt and banking situation in Europe as well as the potential for a significant slowdown in global economic growth and for a sharper-than-anticipated fiscal contraction in the United States. A number of members noted that if the recent modest rate of economic growth were to persist, the economy would be less able to weather a material adverse shock without slipping back into recession. Most members continued to anticipate that, with longer-term inflation expectations stable and the existing slack in resource utilization being taken up very gradually, inflation would run over the medium term at a rate at or below the Committee's objective of 2 percent. In contrast, one member thought that the economy may be operating near its current potential and, thus, that maintaining the Committee's current highly accommodative policy stance well into 2014 would pose upside risks to the inflation outlook. The Committee had provided additional accommodation at its previous meeting by announcing the continuation of the maturity extension program through the end of the year, and more time was seen as necessary to evaluate the effects of that decision. Nonetheless, many members expected that at the end of 2014, the unemployment rate would still be well above their estimates of its longer-term normal rate and that inflation would be at or below the Committee's longer-run objective of 2 percent. A number of them indicated that additional accommodation could help foster a more rapid improvement in labor market conditions in an environment in which price pressures were likely to be subdued. Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery. Several members noted the benefits of accumulating further information that could help clarify the contours of the outlook for economic activity and inflation as well as the need for further policy action. One member judged that additional accommodation would likely not be effective in improving the economic outlook and viewed the potential costs associated with such action as unacceptably high. At the conclusion of the discussion, members agreed that they would closely monitor economic and financial developments and carefully weigh the potential benefits and costs of various tools in assessing whether additional policy action would be warranted. With respect to the statement to be released following the meeting, members agreed that it should acknowledge the deceleration in economic activity, the small gains in employment, and the slowing in inflation reflected in the economic data over the intermeeting period. Because most saw no significant changes in the medium-run outlook, they agreed to continue to indicate that the Committee anticipates a very gradual pickup in economic activity over time and a slow decline in unemployment, with inflation at or below the rate that it judges most consistent with its dual mandate. Many members expressed support for extending the Committee's forward guidance, but they agreed to defer a decision on this matter until the September meeting in order to consider such an adjustment in the context of updates to participants' individual economic projections and the Committee's further consideration of its policy options. The statement also reiterated the Committee's intention to extend the average maturity of its securities holdings as announced in June. Consistent with the concerns expressed by many members about the slow pace of the economic recovery, the downside risks to economic growth, and the considerable slack in resource utilization, the Committee decided that the statement should conclude by indicating that it will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to continue the maturity extension program it announced in June to purchase Treasury securities with remaining maturities of 6 years to 30 years with a total face value of about $267 billion by the end of December 2012, and to sell or redeem Treasury securities with remaining maturities of approximately 3 years or less with a total face value of about $267 billion. For the duration of this program, the Committee directs the Desk to suspend its current policy of rolling over maturing Treasury securities into new issues. The Committee directs the Desk to maintain its existing policy of reinvesting principal payments on all agency debt and agency mortgage-backed securities in the System Open Market Account in agency mortgage-backed securities. These actions should maintain the total face value of domestic securities at approximately $2.6 trillion. The Committee directs the Desk to engage in dollar roll transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability." The vote encompassed approval of the statement below to be released at 2:15 p.m.: "Information received since the Federal Open Market Committee met in June suggests that economic activity decelerated somewhat over the first half of this year. Growth in employment has been slow in recent months, and the unemployment rate remains elevated. Business fixed investment has continued to advance. Household spending has been rising at a somewhat slower pace than earlier in the year. Despite some further signs of improvement, the housing sector remains depressed. Inflation has declined since earlier this year, mainly reflecting lower prices of crude oil and gasoline, and longer-term inflation expectations have remained stable. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects economic growth to remain moderate over coming quarters and then to pick up very gradually. Consequently, the Committee anticipates that the unemployment rate will decline only slowly toward levels that it judges to be consistent with its dual mandate. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee anticipates that inflation over the medium term will run at or below the rate that it judges most consistent with its dual mandate. To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014. The Committee also decided to continue through the end of the year its program to ex-tend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability." Voting for this action:  Ben Bernanke, William C. Dudley, Elizabeth Duke, Dennis P. Lockhart, Sandra Pianalto, Jerome H. Powell, Sarah Bloom Raskin, Jeremy C. Stein, Daniel K. Tarullo, John C. Williams, and Janet L. Yellen. Voting against this action:  Jeffrey M. Lacker. Mr. Lacker dissented because he did not believe that exceptionally low levels for the federal funds rate were likely to be warranted for the length of time specified in the Committee's statement. In his view, significant uncertainty regarding the evolution of economic conditions over the next few years made the future path of interest rates difficult to forecast, and the Committee's statement implied more confidence on this score than justified by the current outlook. Consensus Forecast Experiment In light of the discussion at the previous FOMC meeting, the subcommittee on communications developed an initial experimental exercise intended to shed light on the feasibility and desirability of constructing an FOMC consensus forecast. At this meeting, participants discussed various aspects of the exercise, such as the possible monetary policy assumptions on which to condition an FOMC consensus forecast, the measurement of the degree of uncertainty surrounding each of the projected variables in the forecast, and the potential for communications benefits. In conclusion, participants generally expressed support for a second exercise to be undertaken in conjunction with the September FOMC meeting. It was agreed that the next meeting of the Committee would be held on Wednesday-Thursday, September 12-13, 2012. The meeting adjourned at 2:15 p.m. on August 1, 2012. Notation Vote By notation vote completed on July 10, 2012, the Committee unanimously approved the minutes of the FOMC meeting held on June 19-20, 2012.   _____________________________ William B. English Secretary

2012-08-01

Statement

Information received since the Federal Open Market Committee met in June suggests that economic activity decelerated somewhat over the first half of this year. Growth in employment has been slow in recent months, and the unemployment rate remains elevated. Business fixed investment has continued to advance. Household spending has been rising at a somewhat slower pace than earlier in the year. Despite some further signs of improvement, the housing sector remains depressed. Inflation has declined since earlier this year, mainly reflecting lower prices of crude oil and gasoline, and longer-term inflation expectations have remained stable. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects economic growth to remain moderate over coming quarters and then to pick up very gradually. Consequently, the Committee anticipates that the unemployment rate will decline only slowly toward levels that it judges to be consistent with its dual mandate. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee anticipates that inflation over the medium term will run at or below the rate that it judges most consistent with its dual mandate. To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014. The Committee also decided to continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability. Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting against the action was Jeffrey M. Lacker, who preferred to omit the description of the time period over which economic conditions are likely to warrant an exceptionally low level of the federal funds rate.

2012-07-11

Minute

Minutes of the Federal Open Market Committee June 19-20, 2012 A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, June 19, 2012, at 11:00 a.m. and continued on Wednesday, June 20, 2012, at 8:30 a.m. PRESENT: Ben Bernanke, Chairman William C. Dudley, Vice Chairman Elizabeth Duke Jeffrey M. Lacker Dennis P. Lockhart Sandra Pianalto Jerome H. Powell Sarah Bloom Raskin Jeremy C. Stein Daniel K. Tarullo John C. Williams Janet L. Yellen James Bullard, Christine Cumming, Charles L. Evans, Esther L. George, and Eric Rosengren, Alternate Members of the Federal Open Market Committee Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, Presidents of the Federal Reserve Banks of Dallas, Minneapolis, and Philadelphia, respectively William B. English, Secretary and Economist Deborah J. Danker, Deputy Secretary Matthew M. Luecke, Assistant Secretary David W. Skidmore, Assistant Secretary Michelle A. Smith, Assistant Secretary Scott G. Alvarez, General Counsel Richard M. Ashton,1  Assistant General Counsel Steven B. Kamin, Economist David W. Wilcox, Economist David Altig, Thomas A. Connors, Michael P. Leahy, William Nelson, Simon Potter, David Reifschneider, Mark S. Sniderman, William Wascher, John A. Weinberg, and Kei-Mu Yi, Associate Economists Brian Sack, Manager, System Open Market Account Nellie Liang, Director, Office of Financial Stability Policy and Research, Board of Governors Jon W. Faust and Andrew T. Levin, Special Advisors to the Board, Office of Board Members, Board of Governors Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors Seth B. Carpenter, Senior Associate Director, Division of Monetary Affairs, Board of Governors; Timothy P. Clark, Senior Associate Director, Division of Banking Supervision and Regulation, Board of Governors Thomas Laubach, Senior Adviser, Division of Research and Statistics, Board of Governors; Ellen E. Meade, Stephen A. Meyer, and Joyce K. Zickler, Senior Advisers, Division of Monetary Affairs, Board of Governors Daniel M. Covitz, Eric M. Engen, Michael T. Kiley,2  David E. Lebow, and Michael G. Palumbo, Associate Directors, Division of Research and Statistics, Board of Governors David Bowman, Deputy Associate Director, Division of International Finance, Board of Governors Steven A. Sharpe and John J. Stevens, Assistant Directors, Division of Research and Statistics, Board of Governors David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors Francisco Covas and Jennifer E. Roush, Senior Economists, Division of Monetary Affairs, Board of Governors; Andrea De Michelis, Senior Economist, Division of International Finance, Board of Governors Sarah G. Green, First Vice President, Federal Reserve Bank of Richmond Loretta J. Mester and Harvey Rosenblum, Executive Vice Presidents, Federal Reserve Banks of Philadelphia and Dallas, respectively Troy Davig, Geoffrey Tootell, and Christopher J. Waller, Senior Vice Presidents, Federal Reserve Banks of Kansas City, Boston, and St. Louis, respectively John Fernald, Group Vice President, Federal Reserve Bank of San Francisco Lorie K. Logan and Anna Paulson, Vice Presidents, Federal Reserve Banks of New York and Chicago, respectively Organizational Matters By unanimous vote, Simon Potter was selected to serve at the pleasure of the Committee as Manager, System Open Market Account, effective June 30, 2012, on the understanding that his selection was subject to being satisfactory to the Federal Reserve Bank of New York. Secretary's note: Advice subsequently was received that the selection of Mr. Potter as Manager was satisfactory to the Federal Reserve Bank of New York. By unanimous vote, the Committee selected James J. McAndrews to serve as Associate Economist, effective June 30, 2012, until the selection of his successor at the first regularly scheduled meeting of the Committee in 2013. By unanimous vote, the Committee amended the FOMC Policy on External Communications of Federal Reserve System Staff to clarify some specific aspects of the policy.3  Discussion of Communications regarding Economic Projections Meeting participants discussed several possibilities for enhancing the clarity and transparency of the Committee's economic projections and their role in policy decisions and policy communications. In particular, participants noted that while the Summary of Economic Projections (SEP) provides information about their individual projections of key macroeconomic variables and about the path of monetary policy that each sees as appropriate and consistent with his or her projections, the SEP does not provide guidance about how those diverse views come together in the Committee's collective judgment about the outlook and appropriate policy as expressed in its postmeeting statement. Many participants indicated that if it were possible to construct a quantitative economic projection and associated path of appropriate policy that reflected the collective judgment of the Committee, such a projection could potentially be helpful in clarifying how the outlook and policy decisions are related. Participants discussed examples of the economic and policy projections published by a number of foreign central banks. Participants generally indicated a willingness to explore adjustments to the SEP, while highlighting the importance of communicating not only the Committee's collective judgment but also the diversity of their views regarding the economic outlook and monetary policy. Many participants noted that developing a quantitative forecast that reflects the Committee's collective judgment could be challenging, given the range of their views about the economy's structure and dynamics. Several participants judged that the incremental gains in transparency that would result from developing and presenting such a consensus projection would be modest, given the breadth of information already provided in the Committee's policy statements, the minutes of Federal Open Market Committee (FOMC) meetings, and the Chairman's press briefings. Participants agreed to continue to explore ways to increase clarity and transparency in the Committee's policy communications; many noted that the Committee had introduced a number of changes in its communications over the past year or so, and emphasized that further changes should be considered carefully. At the end of the discussion, the Chairman asked the subcommittee on communications to explore the feasibility and workability of potential approaches to developing an FOMC consensus forecast. Developments in Financial Markets and the Federal Reserve's Balance Sheet The Manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets during the period since the FOMC met on April 24-25, 2012. He also reported on System open market operations, including the ongoing reinvestment into agency-guaranteed mortgage-backed securities (MBS) of principal payments received on SOMA holdings of agency debt and agency-guaranteed MBS as well as the operations related to the maturity extension program authorized at the September 20–21, 2011, FOMC meeting. By unanimous vote, the Committee ratified the Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account over the intermeeting period. By unanimous vote, the Authorization for Domestic Open Market Operations was amended to include the authority to conduct small-value operations for the purposes of routine testing of operational readiness. In addition, the Authorization was amended to include the authority to conduct intraday repurchase agreement (repo) transactions with foreign and international accounts to prevent daylight overdrafts in those accounts.4  Staff Review of the Economic Situation The information reviewed at the June 19-20 meeting suggested that economic activity was expanding at a somewhat more modest pace than earlier in the year. Improvements in labor market conditions slowed in recent months, and the unemployment rate remained elevated. Consumer price inflation declined, primarily reflecting reductions in the prices of crude oil and gasoline, and measures of long-run inflation expectations continued to be stable. Private nonfarm employment rose at a slower pace in April and May than in the first quarter of the year, while total government employment continued to trend down. The unemployment rate stood at 8.2 percent in May, essentially the same as its average in the first quarter.  The rate of long-duration unemployment remained very high, and the share of workers employed part time for economic reasons was little changed in recent months. Indicators of job openings and firms' hiring plans were mixed, while initial claims for unemployment insurance were essentially unchanged over the intermeeting period at a level consistent with modest net job gains in the coming months. Manufacturing production edged up, on net, in April and May after rising at a robust pace in the first quarter. Meanwhile, the rate of manufacturing capacity utilization remained about the same as earlier in the year. In recent months, the output of motor vehicles and parts increased further, on balance, although at a slower rate than in the first quarter, while factory output outside of the motor vehicle sector only inched up. Motor vehicle assemblies were scheduled to hold steady in the coming months, and broader indicators of manufacturing production, such as the diffusion indexes of new orders from the national and regional manufacturing surveys, were generally at levels consistent with modest increases in output in the near term. Real personal consumption expenditures increased solidly in the first quarter. In April and May, however, nominal retail sales excluding purchases of motor vehicles declined while sales of motor vehicles slowed from their brisk pace in the first quarter. Factors that tend to support households' expenditures were, on balance, a little softer in recent months. The estimated level of households' real disposable income was revised down for the fourth quarter of last year. Moreover, real disposable income rose at a subdued pace in the first quarter of this year, though it received some boost from lower energy prices in April. Households' net worth increased in the first quarter, but the decline in equity prices during the intermeeting period suggested that net worth may have fallen more recently. Consumer sentiment was lower in early June than earlier in the year, and it continued to be subdued. Activity in the housing sector generally improved in recent months, but it was still restrained by tight credit standards for mortgage loans and the substantial inventory of foreclosed and distressed properties. Both starts and permits of new single-family homes rose in April and May but remained at low levels. Although starts of new multifamily units ran at a somewhat lower pace, on average, in April and May than in the first quarter, permits increased in recent months, likely pointing to further gains in multifamily construction. Home prices rose for the fourth consecutive month in April. Sales of existing homes were a little higher in April than their monthly average in the first quarter, but the pace of new home sales was roughly unchanged. Real business expenditures on equipment and software increased moderately in the first quarter. In April, nominal shipments and orders of nondefense capital goods excluding aircraft decreased. Recent forward-looking indicators, such as surveys of business conditions and capital spending plans, pointed toward continued moderate increases in outlays for business equipment in subsequent months. Nominal business spending for nonresidential construction was essentially flat in April relative to the first quarter. Meanwhile, inventories in most industries looked to be roughly aligned with sales in recent months. Real federal government purchases fell markedly in the first quarter, led by a sharp decrease in defense spending. Data for federal government spending in April and May pointed to a slower pace of decline in defense outlays in the second quarter. Real state and local government purchases also decreased in the first quarter. Moreover, the payrolls of state and local governments contracted in April and May after edging up in the first quarter, and nominal construction spending by these governments continued to decline in April. The U.S. international trade deficit widened in March and then narrowed in April to a level near its average in the first quarter. Both imports and exports rose strongly in March before receding a bit in April. In particular, exports to the euro area, which had increased strongly in the first quarter on a seasonally adjusted basis despite the weakness in economic activity in the region, fell back in April. Overall U.S. consumer prices were flat in April and then fell in May as consumer energy prices declined considerably in both months. Survey data indicated that gasoline prices fell further in the first half of June, in line with continued decreases in crude oil prices. Meanwhile, consumer food prices only edged up in recent months. Consumer prices excluding food and energy increased moderately in April and May. Near-term inflation expectations from the Thomson Reuters/University of Michigan Surveys of Consumers declined in May and held steady in early June, while longer-term inflation expectations in the survey remained stable. Measures of labor compensation indicated that increases in nominal wages continued to be subdued. Gains in compensation per hour in the nonfarm business sector were quite muted over the year ending in the first quarter, and with small gains in productivity, unit labor costs rose only slightly. The employment cost index increased only a little faster than the compensation per hour measure over the same period. More recently, average hourly earnings for all employees edged up in April and May, and their rate of increase from 12 months earlier continued to be slow. Recent indicators suggested that overall foreign economic activity was expanding at a below-trend pace in the second quarter. Euro-area economies appeared to be slowing: Industrial production declined in the euro area in April, and the composite purchasing managers index and indicators of business confidence fell in May to their lowest levels in more than two years. In China, data on production and sales in April and May suggested that economic activity was increasing at a less rapid pace than last year. In both advanced and emerging market economies, declining prices for energy and other commodities contributed to decreases in 12-month measures of inflation since late last year. Staff Review of the Financial Situation Growing concerns about developments in the euro area and weaker-than-expected economic data in the United States and abroad both weighed on financial markets since the time of the April FOMC meeting. The deterioration in investor sentiment was tempered to an extent by market participants' expectations for further policy accommodation by central banks as well as by the anticipation of additional measures to address European fiscal and banking issues. Yields on longer-dated nominal and inflation-protected Treasury securities moved down substantially, on net, over the intermeeting period. The yield on nominal 10-year Treasury securities reached a historically low level immediately following the release of the May employment report. A sizable portion of the decline in longer-term Treasury rates over the period appeared to reflect greater safe-haven demands by investors, along with some increase in market participants' expectations of further Federal Reserve balance sheet actions. Indicators of inflation expectations derived from nominal and inflation-protected Treasury securities also fell, apparently responding at least in part to the decline in commodity prices. The expected path for the federal funds rate derived from money market futures quotes shifted down in 2014 and beyond. There was limited evidence of increased strains in unsecured, short-term dollar funding markets over the intermeeting period despite heightened concerns about the situation in Europe. In secured funding markets, the overnight general collateral Treasury repo rate edged higher. Market participants attributed some portion of the firming in short-term rates over the past several months to a temporary increase in short-dated Treasury securities held by dealers as a result of cumulative net Treasury issuance of such securities and sales of these securities by the Federal Reserve under its maturity extension program. Broad U.S. stock price indexes declined, and option-implied volatility on the S&P 500 index rose. Equity prices for large domestic banks significantly underperformed the broad indexes amid uncertainty about the situation in Europe and the outlook for the global economy. Disclosure of a large trading loss at a major U.S. bank also contributed to the underperformance. Investors' expectation that five large U.S. banks would have their credit ratings downgraded at the end of June, as part of rating agencies' review of major financial institutions, may also have weighed on the equity prices of those banks. In the June 2012 Senior Credit Officer Opinion Survey on Dealer Financing Terms (SCOOS), respondents reported that terms in a variety of dealer-intermediated markets were little changed over the past three months. Some respondents reported a decline in the use of leverage by hedge funds across various transaction types. Yields on investment- and speculative-grade corporate debt remained low by historical standards, but their spreads over comparable-maturity Treasury securities widened a bit. Nonfinancial firms continued to raise funds at a solid pace over the period, with the proceeds primarily used to refinance existing debt. Both commercial and industrial (C&I) loans and nonfinancial commercial paper outstanding increased, on net, during April and May. New syndicated loan issuance also appeared to remain solid, although there were some reports of tighter terms. Gross public equity issuance by nonfinancial firms remained strong in April and into May but then slowed after the poor performance of a prominent initial public offering. Financing conditions for the commercial real estate sector remained strained over the intermeeting period. Even so, issuance of commercial mortgage-backed securities in April and May outpaced issuance during the first quarter. Credit conditions in residential mortgage markets continued to be tight. Mortgage refinancing activity rose in April and May but remained subdued despite further declines in mortgage rates to historically low levels. Consumer credit expanded at a solid pace in recent months, as increases in student loans boosted nonrevolving credit while revolving credit was about flat. Delinquency rates for consumer credit remained low, partly reflecting a shift in the composition of borrowers toward those with higher credit scores. Gross issuance of long-term municipal bonds picked up in April and May, with net issuance turning positive for the first time since the beginning of 2011. However, credit default swap spreads for state governments generally moved higher, and spreads on long-term general obligation municipal bonds over comparable-maturity Treasury securities rose as well. Bank credit expanded in April and May. Banks' holdings of securities continued to rise, and core loans—C&I, real estate, and consumer loans—also increased modestly. The May Survey of Terms of Business Lending indicated that lending conditions again eased slightly, although perhaps less so for small businesses. M2 increased at a somewhat slower pace in April and May than in the first quarter of the year. The level of M2 and its largest component—liquid deposits—remained elevated, apparently reflecting investors' continued desire to hold safe and liquid assets. Heightened financial strains in the euro area and indications of a weaker pace of global economic activity weighed on foreign financial markets during the intermeeting period. Yields on most euro-area peripheral countries' sovereign debt rose, particularly after the May 6 elections in Greece failed to produce a new government. In addition, indicators of the conditions of European banks continued to deteriorate: Rating agencies downgraded major banks in Germany, Italy, Spain, and several other European countries; prices of euro-area bank stocks fell sharply; and credit default swap premiums for many euro-area banks increased. Pressures on Spanish banks led euro-area authorities to agree to provide official aid to the Spanish government for the purpose of recapitalizing the country's troubled banks. Indicators of funding market stresses remained muted, as many banks obtained funds from the European Central Bank (ECB) rather than interbank markets. The spreads of euro London interbank offered rates (or euro LIBOR) over comparable overnight index swap rates, along with implied basis spreads from euro–dollar swaps, were little changed at short maturities, and the amount of dollar swaps outstanding with the ECB declined on balance. The total outstanding amount drawn on the Federal Reserve's dollar liquidity swap lines with foreign central banks dropped to $24.2 billion over the intermeeting period. Although equity prices in many countries rallied modestly late in the intermeeting period, global equity prices declined, on balance, over the period, with especially large net decreases in Japan and many emerging market economies. Flight-to-safety flows helped push yields on both U.K. and German 10-year sovereign debt to record lows before these rates partly retraced their declines. The staff's broad nominal dollar index ended the intermeeting period up moderately. Signs of a slowdown in global economic growth prompted policy easing by central banks in Brazil, China, and Australia, and the Bank of England announced new lending initiatives. The risks to the U.S. financial system emanating from strains in Europe appeared to increase over the intermeeting period. Although signs of strains in short-term funding markets were muted, the reliance of some financial firms on these markets remained a potential vulnerability, given that investors could withdraw rapidly in a period of financial stress. Respondents to the June 2012 SCOOS reported that financial institutions and market participants had increased the amount of resources and attention devoted to the management of concentrated exposures to central counterparties and other financial utilities. Staff Economic Outlook In the economic projection prepared by the staff for the June FOMC meeting, the forecast for real gross domestic product (GDP) growth in the near term was revised down. The revision reflected data indicating a slower pace of private-sector job gains, more-subdued retail sales, a lower trajectory for personal income, greater restraint in government purchases, and weaker net exports than the staff anticipated at the time of the previous projection. Moreover, recent adverse developments in Europe and tighter domestic financial conditions led the staff to revise down somewhat the medium-term forecast for real GDP growth. With the drag from fiscal policy anticipated to increase next year, the staff projected that the growth rate of real GDP would not materially exceed that of potential output until 2014 when economic activity was expected to accelerate gradually, supported by accommodative monetary policy, further improvements in credit availability, and rising consumer and business sentiment. Increases in economic activity were anticipated to narrow the wide margin of slack in labor and product markets only slowly over the projection period, and the unemployment rate was expected to still be elevated at the end of 2014. The staff's near-term projection for inflation was revised down from the forecast prepared for the April FOMC meeting, reflecting a greater-than-expected drop in consumer energy prices. However, the staff's projection for inflation over the medium term was essentially unchanged. With the upward pressure from the earlier run-up in crude oil prices on consumer energy prices unwinding and oil prices expected to decline further, long-run inflation expectations anticipated to remain stable, and substantial resource slack persisting over the forecast period, the staff continued to project that inflation would be subdued through 2014. Participants' Views on Current Conditions and the Economic Outlook In conjunction with this FOMC meeting, meeting participants--the 7 members of the Board of Governors and the presidents of the 12 Federal Reserve Banks, all of whom participate in the deliberations of the FOMC--submitted their assessments of real output growth, the unemployment rate, inflation, and the target federal funds rate for each year from 2012 through 2014 and over the longer run, under each participant's judgment of appropriate monetary policy. The longer-run projections represent each participant's assessment of the rate to which each variable would be expected to converge, over time, under appropriate monetary policy and in the absence of further shocks to the economy. These economic projections and policy assessments are described in the Summary of Economic Projections, which is attached as an addendum to these minutes. In their discussion of the economic situation and outlook, participants agreed that the information received since the Committee's previous meeting suggested that the economy had continued to expand moderately, though many noted that a variety of indicators showed smaller gains than had been anticipated. Growth in employment, in particular, appeared to have slowed in recent months, and the unemployment rate remained elevated. Business fixed investment had continued to advance, and household spending appeared to be rising at a somewhat slower pace than earlier in the year. There were further signs of improvement in the housing sector, but the level of activity remained very low. Volatility in financial markets increased over the intermeeting period, and investors' appetite for riskier assets declined, likely in response to heightened fiscal and financial strains in Europe as well as some weaker-than-expected incoming data about the U.S. economy and foreign economies. Inflation had slowed somewhat, mainly reflecting the decline in the prices of crude oil and gasoline in recent months, and longer-term inflation expectations remained stable. Participants generally interpreted the information that became available during the intermeeting period as suggesting that economic growth would most likely remain moderate over coming quarters and then pick up very gradually. Most participants saw the incoming information as indicating somewhat slower growth in total demand, output, and employment over coming quarters than they had projected in April, and most carried forward some of that downward revision to their projections of medium-term growth. However, some participants judged that the recent weakness in a variety of economic indicators was more likely to prove transitory, and thought that the outlook beyond this year was essentially unchanged. Reflecting the projected moderate pace of growth in production and employment, most participants anticipated that the unemployment rate would decline only slowly. A number of factors continued to be seen as likely to limit the economic expansion to a moderate pace in the near term; these included slow growth or even contraction in some major foreign economies, ongoing and prospective fiscal tightening in the United States, modest growth in household income, and--despite some recent signs of improvement--continued weakness in the housing sector. As in April, participants expected that most of the factors restraining economic expansion would ease over time, and so anticipated that the recovery eventually would gain strength. However, strains in global financial markets, which stemmed primarily from fiscal and banking concerns in Europe, had become more pronounced over the intermeeting period and continued to pose significant downside risks to the economic outlook; the possibility of a sharper-than-anticipated fiscal tightening in the United States also posed a downside risk. Looking beyond the temporary effects on inflation of this year's fluctuations in oil and other commodity prices, almost all participants continued to anticipate that inflation over the medium-term would run at or below the 2 percent rate that the Committee judges to be most consistent with its statutory mandate. In one participant's judgment, appropriate monetary policy would lead to inflation modestly greater than 2 percent for a time in order to bring unemployment down somewhat faster. Some participants indicated that they saw persistent slack in resource utilization as posing downside risks to the outlook for inflation; a few participants judged that the highly accommodative stance of monetary policy posed upside risks to the medium-term inflation outlook. In discussing the household sector, meeting participants noted that real personal consumption expenditures had continued to expand despite weak growth in real disposable income, but that the pace of expansion appeared to have slowed since earlier this year. A few participants expressed concern that slow growth in employment and low levels of consumer confidence would further restrain consumer spending. Many participants, however, said that business contacts had reported that consumer spending was holding up. Several observed that recent declines in gasoline prices would increase households' real incomes and could boost consumer spending in coming quarters. More broadly, improving household balance sheets and a diminishing drag from household deleveraging were seen as likely to help support rising household expenditures over time. Indicators of home sales, construction, and prices suggested some improvement in the housing sector. However, not all regions shared in the gains, and the sector remained depressed overall. Most participants anticipated that housing markets were likely to recover only slowly over time, in part because tight credit standards in mortgage lending meant that low mortgage rates were now generating less of a pickup in home sales and construction than had been the case during the recoveries from earlier recessions. A few participants were more sanguine about the potential for a sizable upturn in housing activity. Still, with residential investment currently a much smaller share of real GDP than during past recoveries, the housing sector seemed unlikely to contribute substantially to a stronger economic recovery. Anecdotal evidence from business contacts indicated that activity in the energy and agriculture sectors continued to advance in recent months. Information from manufacturing and transportation firms was generally less optimistic than earlier in the year. There were a number of reports of slowing sales to Europe and Asia. Contacts in some parts of the country also indicated that firms had become more cautious in their hiring and investment decisions, with most capital investment being undertaken to improve productivity and reduce costs rather than to expand capacity. Some participants cited examples of business contacts saying that heightened uncertainty about future tax and regulatory policies had led them to put potential investment projects on hold until the uncertainty is resolved. Participants expected that fiscal policy would continue to be a drag on economic growth over coming quarters. They generally also saw the federal budget situation as a downside risk to the economic outlook: If an agreement was not reached to address the expiring tax cuts and scheduled spending reductions in current law, a sharp tightening of fiscal policy would occur at the start of 2013. A few participants reported hearing that defense contractors were making contingency plans to reduce their workforces if potential spending cuts go into effect; one reported that some firms already had begun to make such reductions. In contrast, it was noted that an agreement on a credible longer-term plan that put the federal budget on a sustainable path over the medium run in a way that removes the near-term fiscal risks to the recovery would help alleviate uncertainty, likely would have positive effects on consumer and business sentiment, and so could spur an increase in business investment and hiring. Exports helped support U.S. economic growth during the early months of this year. However, recent reports from some business contacts pointed to slowing exports to Europe and China, and several participants noted the risk that economic weakness in Europe or a more significant slowing in the pace of expansion in emerging markets in Asia could damp exports further. A couple of participants expressed the view that the direct effects on the U.S. economy stemming from slower economic growth abroad--effects that would be manifested through declining U.S. exports--would be noticeable but not large. However, another participant noted that recent appreciation of the dollar in foreign exchange markets would also contribute to reduced exports. The pace of improvement in labor market conditions diminished in recent months; in particular, growth in employment slowed. Job growth late last year and early this year was boosted by unusually mild winter weather; some slowing had been expected as weather became more normal during the spring, but the reported slowing was more substantial than many participants had anticipated. One participant noted that the apparent tension between strong employment growth and moderate output growth seen earlier in the year had been resolved more recently by slower job growth rather than faster output growth. Even so, average monthly growth in payrolls from January through May was in line with last year's pace. Meeting participants again discussed the extent of slack in labor markets. Some participants judged that the unemployment rate was being substantially boosted by structural factors such as mismatches between the skills of unemployed workers and those required for available jobs, a view that would imply less slack in labor markets than suggested by a simple comparison of the current unemployment rate to participants' estimates of its longer-run normal level. A couple of participants said they would have expected inflation to slow noticeably if there were substantial and persistent slack. One implication of the view that there is relatively little slack is that providing more monetary stimulus would be likely to raise inflation above the Committee's objective. Some other participants acknowledged that structural factors were contributing to unemployment, but said that, in their view, slack remained high and weak aggregate demand was the major reason that the unemployment rate was still elevated. These participants cited a range of evidence to support their judgment: the still-high fraction of workers who report working part-time jobs because they cannot find full-time work; research showing that job-finding rates among the long-term unemployed were somewhat higher in the recent past than a year earlier; anecdotal evidence to the effect that employers do not see long spells of unemployment as making applicants less attractive for most jobs; and reports that employers were receiving large numbers of applications for each opening and were being especially discriminating when filling vacant positions. Another participant pointed to research showing that, in many countries, inflation is less responsive to downward pressure from labor market slack when inflation is already low than when inflation is elevated, and to evidence that firms in the United States have been reluctant to cut nominal wages in recent years, as indications that sizable slack might not cause inflation to decline from its already low level. These arguments imply that slack in labor markets remains considerable and therefore that a reduction in the unemployment rate toward its longer-run normal level would not have much effect on inflation. Measures of consumer price inflation declined over the intermeeting period, mainly reflecting reductions in oil and gasoline prices since earlier in the year. Several participants noted that they saw little if any evidence of price pressures, commenting that increases in labor costs continued to be subdued and that non-energy commodity prices had declined of late. With longer-run inflation expectations well anchored and the unemployment rate elevated, almost all participants anticipated that inflation in coming quarters and over the medium run would be at or below the 2 percent rate that the Committee judges to be most consistent with its mandate; several had revised down their inflation forecasts. Most participants viewed the risks to their inflation outlook as being roughly balanced. Some participants, however, saw persistent slack in resource utilization as weighting the risks to the outlook for inflation to the downside. In contrast, a few saw inflation risks as tilted to the upside; they generally were skeptical of models that rely on economic slack to forecast inflation and were concerned that maintaining the current highly accommodative stance of monetary policy over the medium run risked eroding the stability of inflation expectations, with a couple noting that large long-run fiscal imbalances also posed a risk. Many FOMC participants judged that overall financial conditions had become somewhat less supportive of growth in demand for goods and services. Investors' concerns about the sovereign debt and banking situation in the euro area reportedly intensified during the intermeeting period, leading to higher risk spreads and lower prices for riskier assets including equities and to broad-based appreciation of the U.S. dollar on foreign exchange markets. In contrast, a few participants observed that the marked drop in yields on longer-term U.S. Treasury securities could provide some impetus to growth. Focusing more narrowly on the banking sector in the United States, it was noted that measures of credit quality for bank loans generally had continued to improve, that bank capital levels were quite high, and that banks had ample liquidity. Consumer and business loans were increasing, although credit standards remained tight and commercial and residential real estate lending were relatively weak. A few participants indicated that they were seeing signs that very low interest rates might be inducing some investors to take on imprudent risks in the search for higher nominal returns. Participants discussed the risk that strains in global financial markets and pressures on European financial institutions could worsen and spill over to parts of the domestic financial sector, and some noted the importance of undertaking adequate preparations to address such spillovers if they were to occur; it also was recognized that investor sentiment could improve and strains in global markets might ease. Several participants commented that it would be desirable to explore the possibility of developing new tools to promote more-accommodative financial conditions and thereby support a stronger economic recovery. Committee Policy Action Committee members saw the information received over the intermeeting period as suggesting that the economy had been expanding moderately. However, growth in employment had slowed in recent months, and almost all members saw the unemployment rate as still elevated relative to levels that they viewed as consistent with the Committee's mandate. Members generally expected growth to be moderate over coming quarters and then to pick up very gradually, with the unemployment rate declining only slowly. Most projected somewhat slower growth through next year, and a smaller reduction in unemployment, than they had projected in April. Furthermore, strains in global financial markets, which largely stemmed from the sovereign debt and banking situation in Europe, had increased during the intermeeting period and continued to pose significant downside risks to economic activity both here and abroad, making the outlook quite uncertain. The possibility that U.S. fiscal policy would be more contractionary than anticipated was also cited as a downside risk. Inflation had slowed, mainly reflecting the decline in the prices of crude oil and gasoline in recent months. Averaging through its recent fluctuations, inflation appeared to be running near the Committee's 2 percent longer-run objective; with longer-term inflation expectations stable, members anticipated that inflation over the medium run would be at or below that rate. Some members judged that persistent slack in resource utilization posed downside risks to the outlook for inflation. In contrast, one member thought that maintaining the current highly accommodative stance of monetary policy well into 2014 would pose upside risks to inflation. In their discussion of monetary policy for the period ahead, members agreed that it would be appropriate to keep the target range for the federal funds rate at 0 to 1/4 percent in order to support a stronger economic recovery and to help ensure that inflation, over time, is at the 2 percent rate that the Committee judges most consistent with its mandate. In addition, all members but one agreed that it would be appropriate to continue through the end of this year the Committee's program to extend the average maturity of the Federal Reserve's holdings of securities; specifically, they agreed to continue purchasing Treasury securities with remaining maturities of 6 years to 30 years at the current pace of about $44 billion per month while selling or redeeming an equal amount of Treasury securities with remaining maturities of approximately 3 years or less. These steps would increase the Federal Reserve's holdings of longer-term Treasury securities by about $267 billion while reducing its holdings of shorter-term Treasury securities by the same amount. Members also agreed to maintain the Committee's existing policy regarding the reinvestment of principal payments from Federal Reserve holdings of agency securities into agency MBS. Members generally judged that continuing the maturity extension program would put some downward pressure on longer-term interest rates and help make broader financial conditions more accommodative. Some members noted the risk that continued purchases of longer-term Treasury securities could, at some point, lead to deterioration in the functioning of the Treasury securities market that could undermine the intended effects of the policy. However, members generally agreed that such risks seemed low at present, and were outweighed by the expected benefits of the action. Several members noted that the downward pressure on longer-term rates from continuing the Committee's maturity extension program was likely to be modest. One member anticipated little if any effect on economic growth and unemployment and did not agree that the outlook for economic activity and inflation called for further policy accommodation. With respect to the statement to be released following the meeting, members agreed that only relatively small modifications to the first two paragraphs were needed to reflect the incoming economic data and the changes to the economic outlook. In light of their assessment of the economic situation, almost all members again agreed to indicate that the Committee expects to maintain a highly accommodative stance for monetary policy and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014. Some Committee members indicated that their policy judgment reflected in part their perception of significant downside risks to growth, especially since the Committee's ability to respond to weaker-than-expected economic conditions would be somewhat limited by the constraint imposed on monetary policy when the policy rate is at or near its effective lower bound. Members again noted that the forward guidance is conditional on economic developments and that the date given in the statement would be subject to revision should there be a significant change in the economic outlook. A few members expressed the view that further policy stimulus likely would be necessary to promote satisfactory growth in employment and to ensure that the inflation rate would be at the Committee's goal. Several others noted that additional policy action could be warranted if the economic recovery were to lose momentum, if the downside risks to the forecast became sufficiently pronounced, or if inflation seemed likely to run persistently below the Committee's longer-run objective. The Committee agreed that it was prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability. A few members observed that it would be helpful to have a better understanding of how large the Federal Reserve's asset purchases would have to be to cause a meaningful deterioration in securities market functioning, and of the potential costs of such deterioration for the economy as a whole. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to continue the maturity extension program it began in September to purchase, by the end of June 2012, Treasury securities with remaining maturities of 6 years to 30 years with a total face value of $400 billion, and to sell Treasury securities with remaining maturities of 3 years or less with a total face value of $400 billion. Following the conclusion of these purchases, the Committee directs the Desk to purchase Treasury securities with remaining maturities of 6 years to 30 years with a total face value of about $267 billion by the end of December 2012, and to sell or redeem Treasury securities with remaining maturities of approximately 3 years or less with a total face value of about $267 billion. For the duration of this program, the Committee directs the Desk to suspend its current policy of rolling over maturing Treasury securities into new issues. The Committee directs the Desk to maintain its existing policy of reinvesting principal payments on all agency debt and agency mortgage-backed securities in the System Open Market Account in agency mortgage-backed securities. These actions should maintain the total face value of domestic securities at approximately $2.6 trillion. The Committee directs the Desk to engage in dollar roll transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability." The vote encompassed approval of the statement below to be released at 12:30 p.m.: "Information received since the Federal Open Market Committee met in April suggests that the economy has been expanding moderately this year. However, growth in employment has slowed in recent months, and the unemployment rate remains elevated. Business fixed investment has continued to advance. Household spending appears to be rising at a somewhat slower pace than earlier in the year. Despite some signs of improvement, the housing sector remains depressed. Inflation has declined, mainly reflecting lower prices of crude oil and gasoline, and longer-term inflation expectations have remained stable. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects economic growth to remain moderate over coming quarters and then to pick up very gradually. Consequently, the Committee anticipates that the unemployment rate will decline only slowly toward levels that it judges to be consistent with its dual mandate. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee anticipates that inflation over the medium term will run at or below the rate that it judges most consistent with its dual mandate. To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014. The Committee also decided to continue through the end of the year its program to extend the average maturity of its holdings of securities. Specifically, the Committee intends to purchase Treasury securities with remaining maturities of 6 years to 30 years at the current pace and to sell or redeem an equal amount of Treasury securities with remaining maturities of approximately 3 years or less. This continuation of the maturity extension program should put downward pressure on longer-term interest rates and help to make broader financial conditions more accommodative. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee is prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability." Voting for this action: Ben Bernanke, William C. Dudley, Elizabeth Duke, Dennis P. Lockhart, Sandra Pianalto, Jerome H. Powell, Sarah Bloom Raskin, Jeremy C. Stein, Daniel K. Tarullo, John C. Williams, and Janet L. Yellen. Voting against this action: Jeffrey M. Lacker. Mr. Lacker dissented because he opposed continuation of the maturity extension program. He did not believe that further monetary stimulus at this time would make a substantial difference for economic growth and employment without also increasing inflation by more than would be desirable. In Mr. Lacker's view, the outlook for economic growth had clearly weakened of late, but he questioned whether the maturity extension program would have much effect in current circumstances. Should inflation fall substantially and persistently below the Committee's 2 percent goal, however, he felt that monetary stimulus might then be appropriate to ensure the return of inflation toward target. It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, July 31-August 1, 2012. The meeting adjourned at 11:05 a.m. on June 20, 2012. Notation Vote By notation vote completed on May 15, 2012, the Committee unanimously approved the minutes of the FOMC meeting held on April 24-25, 2012. _____________________________ William B. English Secretary 1. Attended Tuesday's morning session only. Return to text 2. Attended Tuesday's session only. Return to text 3. The policy is available at www.federalreserve.gov/monetarypolicy/files/FOMC_ExtCommunicationStaff.pdf. Return to text 4. The authorization is available at www.federalreserve.gov/monetarypolicy/files/FOMC_DomesticAuthorization.pdf. Return to text

2012-06-20

Statement

Information received since the Federal Open Market Committee met in April suggests that the economy has been expanding moderately this year. However, growth in employment has slowed in recent months, and the unemployment rate remains elevated. Business fixed investment has continued to advance. Household spending appears to be rising at a somewhat slower pace than earlier in the year. Despite some signs of improvement, the housing sector remains depressed. Inflation has declined, mainly reflecting lower prices of crude oil and gasoline, and longer-term inflation expectations have remained stable. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects economic growth to remain moderate over coming quarters and then to pick up very gradually. Consequently, the Committee anticipates that the unemployment rate will decline only slowly toward levels that it judges to be consistent with its dual mandate. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee anticipates that inflation over the medium term will run at or below the rate that it judges most consistent with its dual mandate. To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014. The Committee also decided to continue through the end of the year its program to extend the average maturity of its holdings of securities. Specifically, the Committee intends to purchase Treasury securities with remaining maturities of 6 years to 30 years at the current pace and to sell or redeem an equal amount of Treasury securities with remaining maturities of approximately 3 years or less. This continuation of the maturity extension program should put downward pressure on longer-term interest rates and help to make broader financial conditions more accommodative. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee is prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability. Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting against the action was Jeffrey M. Lacker, who opposed continuation of the maturity extension program. Statement Regarding Continuation of the Maturity Extension Program

2012-05-16

Minute

Minutes of the Federal Open Market Committee April 24-25, 2012 A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, April 24, 2012, at 1:00 p.m., and continued on Wednesday, April 25, 2012, at 8:30 a.m. PRESENT: Ben Bernanke, Chairman William C. Dudley, Vice Chairman Elizabeth Duke Jeffrey M. Lacker Dennis P. Lockhart Sandra Pianalto Sarah Bloom Raskin Daniel K. Tarullo John C. Williams Janet L. Yellen James Bullard, Christine Cumming, Charles L. Evans, Esther L. George, and Eric Rosengren, Alternate Members of the Federal Open Market Committee Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, Presidents of the Federal Reserve Banks of Dallas, Minneapolis, and Philadelphia, respectively William B. English, Secretary and Economist Deborah J. Danker, Deputy Secretary Matthew M. Luecke, Assistant Secretary David W. Skidmore, Assistant Secretary Michelle A. Smith, Assistant Secretary Scott G. Alvarez, General Counsel Thomas C. Baxter, Deputy General Counsel Steven B. Kamin, Economist David W. Wilcox, Economist David Altig, Thomas A. Connors, Michael P. Leahy, William Nelson, Simon Potter, David Reifschneider, and William Wascher, Associate Economists Brian Sack, Manager, System Open Market Account Michael S. Gibson, Director, Division of Banking Supervision and Regulation, Board of Governors Nellie Liang, Director, Office of Financial Stability Policy and Research, Board of Governors Jon W. Faust and Andrew T. Levin, Special Advisors to the Board, Office of Board Members, Board of Governors James A. Clouse, Deputy Director, Division of Monetary Affairs, Board of Governors; Matthew J. Eichner, Deputy Director, Division of Research and Statistics, Board of Governors Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors Thomas Laubach, Senior Adviser, Division of Research and Statistics, Board of Governors; Ellen E. Meade, Senior Adviser, Division of Monetary Affairs, Board of Governors Daniel M. Covitz and David E. Lebow, Associate Directors, Division of Research and Statistics, Board of Governors David Bowman, Deputy Associate Director, Division of International Finance, Board of Governors; Gretchen C. Weinbach, Deputy Associate Director, Division of Monetary Affairs, Board of Governors Jane E. Ihrig, Assistant Director, Division of Monetary Affairs, Board of Governors David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors Gregory L. Stefani, First Vice President, Federal Reserve Bank of Cleveland Jeff Fuhrer, Loretta J. Mester, Harvey Rosenblum, and Daniel G. Sullivan, Executive Vice Presidents, Federal Reserve Banks of Boston, Philadelphia, Dallas, and Chicago, respectively Troy Davig, Ron Feldman, Mark E. Schweitzer, Christopher J. Waller, Senior Vice Presidents, Federal Reserve Banks of Kansas City, Minneapolis, Cleveland, and St. Louis, respectively John Fernald, Group Vice President, Federal Reserve Bank of San Francisco Andreas L. Hornstein and Lorie K. Logan, Vice Presidents, Federal Reserve Banks of Richmond and New York, respectively Monetary Policy under Alternative Scenarios A staff presentation provided an overview of an exercise that explored individual participants' views on appropriate monetary policy responses under alternative economic scenarios. Committee participants discussed the potential value and drawbacks of this type of exercise for both internal deliberations and external communications about monetary policy. Possible benefits include helping to clarify the factors that individual participants judge most important in forming their views about the economic outlook and their assessments of appropriate monetary policy. Two potential limitations of this approach are that the scenario descriptions must by necessity be incomplete, and the practical range of scenarios that can be examined may be insufficient to be informative, given the degree of uncertainty surrounding possible outcomes. Some participants stated that exercises using alternative scenarios, with appropriate adjustments, could potentially be helpful for internal deliberations and, thus, should be explored further. However, no decision was made at this meeting regarding future exercises along these lines. Developments in Financial Markets and the Federal Reserve's Balance Sheet The Manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets during the period since the Federal Open Market Committee (FOMC) met on March 13, 2012. He also reported on System open market operations, including the ongoing reinvestment into agency-guaranteed mortgage-backed securities (MBS) of principal payments received on SOMA holdings of agency debt and agency-guaranteed MBS as well as the operations related to the maturity extension program authorized at the September 20-21, 2011, FOMC meeting. By unanimous vote, the Committee ratified the Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account over the intermeeting period. With Mr. Lacker dissenting, the Committee agreed to extend the reciprocal currency (swap) arrangements with the Bank of Canada and the Banco de México for an additional year beginning in mid-December 2012; these arrangements are associated with the Federal Reserve's participation in the North American Framework Agreement of 1994. The arrangement with the Bank of Canada allows for cumulative drawings of up to $2 billion equivalent, and the arrangement with the Banco de México allows for cumulative drawings of up to $3 billion equivalent. The vote to renew the System's participation in these swap arrangements was taken at this meeting because a provision in the Framework Agreement requires each party to provide six months' prior notice of an intention to terminate its participation. Mr. Lacker dissented because of his opposition, as indicated at the January meeting, to foreign exchange market intervention by the Federal Reserve, which such swap arrangements might facilitate, and because of his opposition to direct lending to foreign central banks. Staff Review of the Economic Situation The information reviewed at the April 24-25 meeting suggested that economic activity was expanding moderately. Payroll employment continued to move up, and the unemployment rate, while still elevated, declined a little further. Overall consumer price inflation increased somewhat, primarily reflecting higher prices of crude oil and gasoline, but measures of long-run inflation expectations remained stable. The unemployment rate declined to 8.2 percent in March. The share of workers employed part time for economic reasons also moved down, but the rate of long-duration unemployment remained elevated. Private nonfarm employment rose at a slower pace in March than in the preceding three months, while total government employment was little changed in recent months after declining last year. Some indicators of job openings and firms' hiring plans improved. After being roughly flat over most of the intermeeting period, initial claims for unemployment insurance rose moderately toward the end of the period but remained at a level consistent with further moderate job gains in the coming months. Manufacturing production expanded, on net, in February and March, while the rate of manufacturing capacity utilization was essentially unchanged. In recent months, the production of motor vehicles continued to rise appreciably in response to both higher vehicle sales and dealers' additions to relatively low levels of inventories; output gains in other industries also were solid and widespread. Motor vehicle assemblies were scheduled to step up further in the second quarter, and broader indicators of manufacturing activity, such as the diffusion indexes of new orders from the national and regional manufacturing surveys, were at levels consistent with moderate increases in factory output in the second quarter. Real personal consumption expenditures (PCE) rose briskly in February, even though households' real disposable incomes declined. In March, nominal retail sales excluding purchases of motor vehicles increased solidly, while motor vehicle sales fell off a little from their brisk pace in the previous month. Consumer sentiment was little changed, on balance, in March and early April and remained subdued. Some measures of home prices rose in January and February, but activity in the housing market continued to be held down by the large inventory of foreclosed and distressed properties and by tight underwriting standards for mortgage loans. Starts of new single-family homes fell back in February and March to a level more in line with permit issuance; starts were apparently boosted by unseasonably warm weather in December and January. Moreover, sales of new and existing homes edged down, on net, in recent months. Real business expenditures on equipment and software appeared to rise modestly in the first quarter. Nominal shipments of nondefense capital goods excluding aircraft increased in February and March after declining in January; new orders for these capital goods increased, on balance, in February and March, and they continued to run above the level of shipments. The buildup of unfilled orders in recent months, along with improvements in survey measures of capital spending plans and some other forward-looking indicators, pointed toward a pickup in the pace of expenditures for business equipment. In contrast, nominal business spending for nonresidential construction declined in January and February. Inventories in most industries looked to be fairly well aligned with sales in recent months, although motor vehicle stocks were still relatively lean. Data for federal government spending in recent months indicated that real defense expenditures rose modestly in the first quarter. Real state and local government purchases appeared to be about flat last quarter, as the payrolls of these governments edged up in the first quarter and their nominal construction spending declined slightly, on net, in January and February. The U.S. international trade deficit narrowed in February as exports rose and imports fell. The export gains were concentrated in services. Exports of goods declined largely because of a decrease in exports of automotive products. The drop in imports reflected significant declines in imports of petroleum products, automotive products, capital goods, and consumer goods. Imports from China were especially weak, which may in part reflect seasonal adjustment issues related to the timing of the Chinese New Year. Overall U.S. consumer prices, as measured by the PCE price index, rose at a somewhat faster rate in February than in the preceding six months. In March, prices measured by the consumer price index increased at that same faster pace. Consumer energy prices climbed markedly in February and March, although survey data indicated that gasoline prices stepped down in the first half of April. Meanwhile, increases in consumer food prices were relatively subdued in recent months. Consumer prices excluding food and energy rose moderately in February and March. Near-term inflation expectations from the Thomson Reuters/University of Michigan Surveys of Consumers increased in March but then fell back in early April, while longer-term inflation expectations in the survey remained stable. Available measures of labor compensation indicated that nominal wage gains continued to be muted. Average hourly earnings for all employees rose modestly in March, and their rate of increase from 12 months earlier remained low. Recent indicators suggested that foreign economic activity improved on balance in the first quarter, but there were important differences across economies. In the euro area, economic indicators pointed to weakening activity as financial stresses worsened, whereas in the emerging market economies, recent data were consistent with continued expansion. Readings on foreign inflation eased, although they were still relatively high in some Latin American countries. Staff Review of the Financial Situation Broad financial market conditions changed little, on balance, since the March FOMC meeting. However, asset prices fluctuated substantially over the period, apparently in response to the evolving views on the U.S. and global economic outlook and changing expectations regarding the future course of monetary policy. Yields on nominal Treasury securities moved up early in the period, reportedly as investors read incoming information, including the March FOMC statement and minutes along with the results of the Comprehensive Capital Analysis and Review (CCAR), as suggesting a somewhat stronger economic outlook than previously expected. Over subsequent weeks, however, yields drifted lower in response to disappointing economic news and increased concerns about the strains in Europe. On net, nominal Treasury yields finished the period slightly lower and measures of the expected path for the federal funds rate derived from overnight index swap (OIS) rates moved down. Conditions in unsecured short-term dollar funding markets were stable over most of the intermeeting period despite the increase in concerns about Europe in the latter part of the period. In secured funding markets, the overnight general collateral Treasury repurchase agreement rate declined for a time late in the period, reportedly in response to the seasonal reduction in Treasury bill issuance in April, but ended the period roughly unchanged. Broad U.S. stock price indexes followed the general pattern observed across asset markets, rising early in the period on increased investor optimism and then falling later on, to end the period little changed on net. Equity prices of financial institutions increased, reportedly as investors interpreted the first-quarter earnings of several large banking organizations and the results of the CCAR as better than expected. Yields and spreads on investment-grade corporate bonds were about unchanged, but yields and spreads on speculative-grade corporate bonds increased somewhat. Businesses continued to raise substantial amounts of funds in credit and capital markets over recent months. Bond issuance by financial firms picked up further in March from the strong pace recorded in the previous two months. Domestic nonfinancial firms' bond issuance and growth in commercial and industrial (C&I) loans were robust in the first quarter. Leveraged loan issuance was brisk over this period as well, reportedly supported by investor demand for newly issued collateralized loan obligations as well as by interest from pension funds and other institutional investors. Gross public equity issuance by nonfinancial firms stayed strong in March. In contrast, financial conditions in the commercial real estate (CRE) sector remained strained amid weak fundamentals and tight underwriting conditions, and issuance of commercial mortgage-backed securities in the first quarter of 2012 was below that of a year ago. With respect to credit to households, developments over the intermeeting period were mixed. Although mortgage rates remained near their historical lows, mortgage refinancing activity was subdued, and conditions in residential mortgage markets continued to be weak. By contrast, consumer credit rose at a solid pace, on balance, in recent months; nonrevolving credit, particularly student loans, expanded. Issuance of consumer asset-backed securities (ABS) edged up in recent months, supported by auto-loan ABS issuance. Gross issuance of long-term municipal bonds was subdued in the first quarter. The ratio of general obligation municipal bond yields to yields on comparable-maturity Treasury securities was little changed over the intermeeting period, and the average spreads on credit default swaps for debt issued by states declined on net. Bank credit slowed in March but expanded at a solid pace in the first quarter as a whole. The Senior Loan Officer Opinion Survey on Bank Lending Practices conducted in April indicated that, in the aggregate, domestic banks eased slightly their lending standards on core loans--C&I, real estate, and consumer loans--and experienced somewhat stronger demand for such loans in the first quarter of 2012. C&I loans at domestic banks continued to expand in March, with growth concentrated at large domestic banks. Banks' holdings of closed-end residential mortgage loans expanded, while home equity loans and CRE loans continued to decline. Consumer loans on banks' books rose modestly in March. M2 expanded at a moderate pace in March, reflecting growth in liquid deposits and currency that was only partially offset by declines in small time deposits and in balances in retail money market funds. Financial strains within the euro area increased over the intermeeting period. Spreads of yields on sovereign Italian and Spanish debt over those on comparable-maturity German bonds rose, amid official warnings that Spain would miss its fiscal target for this year and would need to make further budget cuts, as well as renewed concerns in the market about the prospects for Spanish banks. Although the spread of the three-month euro London interbank offered rate over the comparable OIS rate narrowed on balance over the period, euro-area bank equity indexes dropped sharply, driven by declines in the share prices of Spanish and Italian banks. Five-year credit default swap premiums rose for a broad range of euro-area banks, especially Spanish banks. Against the background of these increased stresses within the euro area, foreign equity indexes declined and corporate credit spreads widened. The staff's broad nominal index of the foreign exchange value of the dollar was about unchanged over the intermeeting period as the dollar appreciated against most emerging market currencies but depreciated moderately against the yen and sterling. Amid some volatility, yields on benchmark sovereign bonds for Germany and Japan ended the period somewhat lower. Monetary policy abroad remained generally accommodative. The total outstanding amount on the Federal Reserve's dollar liquidity swap lines declined to $32 billion, down from $65 billion at the time of the March FOMC meeting; demand for dollars fell at the lending operations of the European Central Bank, the Bank of Japan, and the Swiss National Bank. Staff Economic Outlook In the economic forecast prepared for the April FOMC meeting, the staff revised up slightly its near-term projection for real gross domestic product (GDP) growth, reflecting that the unemployment rate was a little lower, the level of overall payroll employment a bit higher, and consumer spending noticeably stronger than the staff had expected at the time of the previous forecast. However, the staff's medium-term projection for real GDP growth in the April forecast was little changed from the one presented in March. The staff continued to project that real GDP would accelerate gradually through 2014, supported by accommodative monetary policy, further improvements in credit availability, and rising consumer and business sentiment. Increases in economic activity were expected to be sufficient to decrease the wide margin of slack in the labor market slowly over the projection period, but the unemployment rate was anticipated to still be elevated at the end of 2014. The staff's forecast for inflation over the projection period was just a bit above the forecast prepared for the March FOMC meeting, reflecting somewhat higher-than-expected data on core consumer prices and a slightly narrower margin of economic slack than in the March forecast. However, with the pass-through of the recent run-up in crude oil prices into consumer energy prices seen as nearly complete, oil prices expected to edge lower from current levels, substantial resource slack persisting over the projection period, and stable long-run inflation expectations, the staff continued to forecast that inflation would be subdued through 2014. Participants' Views on Current Conditions and the Economic Outlook In conjunction with this FOMC meeting, meeting participants--the five members of the Board of Governors and the presidents of the 12 Federal Reserve Banks, all of whom participate in the deliberations of the FOMC--submitted their assessments of real output growth, the unemployment rate, inflation, and the target federal funds rate for each year from 2012 through 2014 and over the longer run, under each participant's judgment of appropriate monetary policy. The longer-run projections represent each participant's assessment of the rate to which each variable would be expected to converge, over time, under appropriate monetary policy and in the absence of further shocks to the economy. These economic projections and policy assessments are described in more detail in the Summary of Economic Projections (SEP), which is attached as an addendum to these minutes. In their discussion of the economic situation and outlook, meeting participants agreed that the information received since the Committee's previous meeting suggested that the economy continued to expand moderately. Labor market conditions improved in recent months. So far this year, payroll employment had expanded at a faster pace than last year and the unemployment rate had declined further, although it remained elevated. Household spending and business fixed investment continued to expand. There were signs of improvement in the housing sector, but from a very low level of activity. Despite some volatility in financial markets over the intermeeting period, financial conditions in U.S. markets continued to improve; bank credit quality and loan demand both increased. Mainly reflecting the increase in the prices of crude oil and gasoline earlier this year, inflation had picked up somewhat. However, longer-term inflation expectations remained stable. Participants' assessments of the economic outlook were little changed, with the intermeeting information generally seen as suggesting that economic growth would remain moderate over coming quarters and then pick up gradually. Reflecting the moderate pace of economic growth, most anticipated a gradual decline in the unemployment rate. The incoming information led some participants to become more confident about the durability of the recovery. However, others thought it was premature to infer a stronger underlying trend from the recent positive indicators, since those readings may partially reflect the effects of the mild winter weather or other temporary influences. A number of factors continued to be seen as likely limiting the economic expansion to a moderate pace in the near term; these included slow growth in some foreign economies, prospective fiscal tightening in the United States, slow household income growth, and--notwithstanding some recent signs of improvement--ongoing weakness in the housing market. Participants continued to expect most of the factors restraining economic expansion to ease over time and so anticipated that the recovery would gradually gain strength. The strains in global financial markets, though generally less pronounced than last fall, continued to pose a significant risk to the outlook, and the possibility of a sharp fiscal tightening in the United States was also considered a sizable risk. Most participants anticipated that inflation would fall back from recent elevated levels as the effects of higher energy prices waned, and still expected that inflation subsequently would run at or below the 2 percent rate that the Committee judges to be most consistent with its statutory mandate. However, other participants saw upside risks to the inflation outlook given the recent pickup in inflation and the highly accommodative stance of monetary policy. In discussing the household sector, meeting participants generally noted that consumer spending continued to expand moderately, notwithstanding high gasoline prices. The recent strengthening in the pace of light motor vehicle sales was attributed to both pent-up demand and the desire for increased fuel efficiency in the wake of higher gasoline prices. Looking forward, increases in household wealth from the rise in equity prices, improving consumer sentiment, and a diminishing drag from household deleveraging were seen as helping to support continued increases in household expenditures, notwithstanding sluggish growth in real disposable income and restrictive fiscal policies. Recent housing-sector indicators, including sales and starts, suggested some upward movement, but some participants saw the improvement as likely related to unusually warm winter weather in much of the country. Overall, the level of activity in the sector remained depressed. House prices appeared to be stabilizing but had not yet begun to rise in most markets. Most participants anticipated that the housing sector was likely to recover only slowly over time, but a few were more optimistic about the potential for a more rapid housing recovery given reports of stronger demand in some regions and of improved sentiment among builders, as well as signs that recent changes to the Home Affordable Refinance Program were contributing to the refinancing of performing high loan-to-value mortgages. Reports from business contacts indicated that activity in the manufacturing, energy, and agriculture sectors continued to advance in recent months. Auto production had picked up in light of strengthening demand. Business contacts suggested that sentiment was improving, but many firms remained somewhat cautious in their hiring and investment decisions, with most capital investment being undertaken to improve productivity or gain market share rather than to expand capacity. Reportedly, this caution reflected in part continued uncertainty about the strength and durability of the economic recovery, as well as about government policies. Participants expected that the government sector would be a drag on economic growth over coming quarters. They generally saw the U.S. fiscal situation also as a risk to the economic outlook; if agreement is not reached on a plan for the federal budget, a sharp fiscal tightening could occur at the start of 2013. Several participants indicated that uncertainty about the trajectory of future fiscal policy could lead businesses to defer hiring and investment. It was noted that agreement on a longer-term plan to address the country's fiscal challenges would help to alleviate uncertainty and consequent negative effects on consumer and business sentiment. Exports have supported U.S. growth so far this year; however, some participants noted risks to the export picture from economic weakness in Europe or from a more significant slowdown in the pace of expansion in China and emerging Asia. Labor market conditions continued to improve, although unusually warm weather may have inflated payroll job figures somewhat earlier this year. Contacts in some parts of the country said that highly qualified workers were in short supply; overall, however, wage pressures had been limited so far. The decline in labor force participation, which has been sharpest for younger workers, has been a factor in the nearly 1 percentage point decline in the unemployment rate since last August, a drop that was larger than would have been predicted from the historical relationship between real GDP growth and changes in the unemployment rate. Assessing the extent to which the changes in labor force participation reflect cyclical factors that will be reversed once the recovery picks up, as opposed to changes in the trend rate of participation, was seen as important for understanding unemployment dynamics going forward. One participant cited research suggesting that about half of the decline in labor force participation had reflected cyclical factors, and thus, as participation picks up, unemployment may decline more slowly in coming quarters compared with the recent pace. Another posited that the strength in payroll job growth in recent months may be a one-time reaction to the sharp layoffs in 2008 and 2009 and that future job gains may be somewhat weaker unless the pace of economic growth increases. Participants expressed a range of views on the extent to which the unemployment rate was being boosted by structural factors such as mismatches between the skills of unemployed workers and those being demanded by hiring firms. A few participants acknowledged there could be structural factors at work, but said that in their view, slack remained high and weak aggregate demand was the major reason that unemployment was still elevated. Two noted the possibility that sustained high levels of long-term unemployment could result in higher structural unemployment, an outcome that might be forestalled by increased aggregate demand. A few participants noted that current measures of labor market slack would be overstated if structural factors accounted for a large portion of the current high levels of unemployment. As a result, such measures might be an unreliable guide as to how close the economy was to maximum employment. These participants pointed out that, over time, estimates of the potential level of output have declined, reducing, as a consequence, estimates of the level of economic slack. Some participants cited the recent rise in inflation, abstracting from the direct effect of the rise in energy prices, as supportive of the view that the level of slack was lower than some believe. Participants judged that, in general, conditions in domestic credit markets had continued to improve since the March FOMC meeting. Bank credit quality and consumer and business loan demand were increasing, although commercial and residential real estate lending remained relatively weak. U.S. equity prices had risen early in the intermeeting period but subsequently declined, ending the period little changed on net; investment-grade corporate bond yields were flat to down slightly and remained at very low levels. Many U.S. financial institutions had been taking steps to bolster their resiliency, including increasing capital levels and liquidity buffers, and reducing their European exposures. A few participants indicated that they were seeing signs that very low interest rates might be inducing some investors to take on imprudent risks in the search for higher nominal returns. In contrast to improved conditions in domestic credit markets, investors' concerns about the sovereign debt and banking situation in the euro area intensified during the intermeeting period. Some participants said they thought the policy actions taken in Europe would most likely ease stress in financial markets, but some expressed the view that a longer-term solution to the banking and fiscal problems in the euro area would require substantial further adjustment in the banking and public sectors. Participants expected that global financial markets would remain focused on the evolving situation in Europe. Readings on consumer price inflation had picked up somewhat mainly because of increases in oil and gasoline prices earlier in the year. In recent weeks, oil prices had begun to fall and readings from the oil futures market suggested this may continue; non-energy commodity prices had remained relatively stable. Several participants noted that increases in labor costs continued to be subdued. With longer-run inflation expectations well anchored and the unemployment rate elevated, most participants anticipated that after the temporary effect of the rise in oil and gasoline prices had run its course, inflation would be at or below the 2 percent rate that the Committee judges to be most consistent with its mandate. Overall, most participants viewed the risks to their inflation outlook as being roughly balanced. However, some participants saw a risk that inflation pressures could increase as the expansion continued; they pointed to the fact that inflation was currently above target and were skeptical of models that rely on economic slack to forecast inflation partly because of the difficulty in measuring slack, especially in real time. These participants were concerned that maintaining the current highly accommodative stance of monetary policy over the medium run could erode the stability of inflation expectations and risk higher inflation. In this regard, one participant noted the potential risks and costs associated with additional balance sheet actions. In their discussion of the economic outlook and policy, some participants noted the potential usefulness of simple monetary policy rules, of the type the Committee regularly reviews, as guides for monetary policy decisionmaking and for external communications about policy. These participants suggested that because such rules give an indication of how policy should systematically respond to changes in economic conditions they might help clarify the relationship between appropriate monetary policy and the evolution of the economic outlook. While acknowledging that there could be differences across participants in the type of rules they might favor--for example, one participant expressed a preference for rules based on growth rates rather than output gaps because of measurement issues--a few participants indicated that the likely degree of commonality across participants was suggestive that this might be a promising approach to explore. However, a few other participants were more skeptical. One thought that, while prescriptions from rules might provide useful benchmarks, applying the rules mechanically and with little thought about the embedded assumptions would be counterproductive. Another participant questioned the value of interest rate rules when the policy rate is constrained by the zero lower bound on nominal interest rates and unconventional policy options are being used, but others indicated they believed the rules could be appropriately adjusted to account for these factors. Interest was expressed in examining the usefulness of simple policy rules in a more normal environment, as well as in the current environment in which the policy rate is at the zero lower bound and large-scale asset purchases and the maturity extension program have been implemented. Participants planned to discuss further, at a future meeting, the potential merits and drawbacks of using simple rules as guides to monetary policy decisionmaking and for communications. Committee Policy Action Members viewed the information on U.S. economic activity received over the intermeeting period as suggesting that the economy had been expanding moderately and generally agreed that the economic outlook was broadly similar to that at the time of their March meeting. Labor market conditions had improved in recent months, and the unemployment rate had fallen, but almost all of the members saw the unemployment rate as still elevated relative to levels that they viewed as consistent with the Committee's mandate. Growth was expected to be moderate over coming quarters and then to pick up over time. Members expected the unemployment rate to decline gradually. Strains in global financial markets stemming from the sovereign debt and banking situation in Europe continued to pose significant downside risks to economic activity both here and abroad. The possibilities that U.S. fiscal policy would be more contractionary than anticipated and that uncertainty about fiscal policy could lead to a deferral of hiring and investment were other downside risks. Recent readings indicated that inflation remained above the Committee's 2 percent longer-run target, primarily reflecting the increase in oil and gasoline prices seen earlier in the year. With longer-term inflation expectations stable, most members anticipated that the increase in inflation would prove temporary and that subsequently inflation would run at or below the rate that the Committee judges to be most consistent with its mandate. However, one member thought that there were upside risks to inflation, especially if the current degree of highly accommodative monetary policy were maintained much beyond this year. In their discussion of monetary policy for the period ahead, the Committee members reached the collective judgment that it would be appropriate to maintain the existing highly accommodative stance of monetary policy. In particular, the Committee agreed to keep the target range for the federal funds rate at 0 to 1/4 percent, to continue the program of extending the average maturity of the Federal Reserve's holdings of securities as announced last September, and to retain the existing policies regarding the reinvestment of principal payments from Federal Reserve holdings of securities. With respect to the statement to be released following the meeting, members agreed that only relatively small modifications to the first two paragraphs were needed to reflect the incoming economic data and the modest changes to the economic outlook. With the economic outlook over the medium term not greatly changed, almost all of the members again agreed to indicate that the Committee expects to maintain a highly accommodative stance for monetary policy and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014. Most members continued to anticipate that the unemployment rate would still be well above their estimates of its longer-run level, and inflation would be at or below the Committee's longer-run objective, in late 2014. Some Committee members indicated that their policy judgment reflected in part their perception of downside risks to growth, especially since the Committee's ability to respond to weaker-than-expected economic conditions would be somewhat limited by the constraint imposed on monetary policy when the policy rate is near the zero lower bound. The need to compensate for a substantial period during which the policy rate was constrained by the zero bound was also cited by a few members as a possible reason to maintain a very low level of the federal funds rate for a longer period than would otherwise be the case. While almost all of the members agreed that the change in the outlook over the intermeeting period was insufficient to warrant an adjustment to the Committee's forward guidance, particularly given the uncertainty surrounding economic forecasts, it was noted that the forward guidance is conditional on economic developments and that the date given in the statement would be subject to revision should there be a significant change in the economic outlook. Some members recalled that gains in employment strengthened in early 2010 and again in early 2011 only to diminish as those years progressed; moreover, the uncertain effects of the unusually mild winter weather were cited as making it harder to discern the underlying trend in the economic data. They viewed these factors as reinforcing the case for leaving the forward guidance unchanged at this meeting and preferred adjusting the forward guidance only once they were more confident that the medium-term economic outlook or risks to the outlook had changed significantly. In contrast, another member thought that the forward guidance should be more responsive to changes in economic developments; that member suggested that the Committee would need to determine the appropriate threshold for altering the guidance. The Committee also stated that it will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability. Several members indicated that additional monetary policy accommodation could be necessary if the economic recovery lost momentum or the downside risks to the forecast became great enough. Committee members discussed the desirability of providing more clarity about the economic conditions that would likely warrant maintaining the current target range for the federal funds rate and those that would indicate that a change in monetary policy was appropriate. Doing so might help the public better understand the conditionality in the Committee's forward guidance. The Committee also discussed the relationship between the Committee's statement, which expresses the collective view of the Committee, and the policy projections of individual participants, which are included in the SEP. The Chairman asked the subcommittee on communications to consider possible enhancements and refinements to the SEP that might help better clarify the link between economic developments and the Committee's view of the appropriate stance of monetary policy. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to continue the maturity extension program it began in September to purchase, by the end of June 2012, Treasury securities with remaining maturities of approximately 6 years to 30 years with a total face value of $400 billion, and to sell Treasury securities with remaining maturities of 3 years or less with a total face value of $400 billion. The Committee also directs the Desk to maintain its existing policies of rolling over maturing Treasury securities into new issues and of reinvesting principal payments on all agency debt and agency mortgage-backed securities in the System Open Market Account in agency mortgage-backed securities in order to maintain the total face value of domestic securities at approximately $2.6 trillion. The Committee directs the Desk to engage in dollar roll transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability." The vote encompassed approval of the statement below to be released at 12:30 p.m.: "Information received since the Federal Open Market Committee met in March suggests that the economy has been expanding moderately. Labor market conditions have improved in recent months; the unemployment rate has declined but remains elevated. Household spending and business fixed investment have continued to advance. Despite some signs of improvement, the housing sector remains depressed. Inflation has picked up somewhat, mainly reflecting higher prices of crude oil and gasoline. However, longer-term inflation expectations have remained stable. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects economic growth to remain moderate over coming quarters then to pick up gradually. Consequently, the Committee anticipates that the unemployment rate will decline gradually toward levels that it judges to be consistent with its dual mandate. Strains in global financial markets continue to pose significant downside risks to the economic outlook. The increase in oil and gasoline prices earlier this year is expected to affect inflation only temporarily, and the Committee anticipates that subsequently inflation will run at or below the rate that it judges most consistent with its dual mandate. To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014. The Committee also decided to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability." Voting for this action:  Ben Bernanke, William C. Dudley, Elizabeth Duke, Dennis P. Lockhart, Sandra Pianalto, Sarah Bloom Raskin, Daniel K. Tarullo, John C. Williams, and Janet L. Yellen. Voting against this action:  Jeffrey M. Lacker. Mr. Lacker dissented because he did not believe that economic conditions were likely to warrant exceptionally low levels of the federal funds rate through late 2014. In his view, an increase in the federal funds rate was likely to be necessary by mid-2013 to prevent the emergence of inflationary pressures. It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, June 19-20, 2012. Because some participants had expressed a preference for the two-day format over the one-day format for FOMC meetings, the Chairman raised the possibility of revising the FOMC meeting schedule to incorporate more two-day meetings to allow additional time for discussion. The meeting adjourned at 11:10 a.m. on April 25, 2012. Notation Vote By notation vote completed on April 2, 2012, the Committee unanimously approved the minutes of the FOMC meeting held on March 13, 2012.   _____________________________ William B. English Secretary

2012-04-25

Statement

Information received since the Federal Open Market Committee met in March suggests that the economy has been expanding moderately. Labor market conditions have improved in recent months; the unemployment rate has declined but remains elevated. Household spending and business fixed investment have continued to advance. Despite some signs of improvement, the housing sector remains depressed. Inflation has picked up somewhat, mainly reflecting higher prices of crude oil and gasoline. However, longer-term inflation expectations have remained stable. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects economic growth to remain moderate over coming quarters and then to pick up gradually. Consequently, the Committee anticipates that the unemployment rate will decline gradually toward levels that it judges to be consistent with its dual mandate. Strains in global financial markets continue to pose significant downside risks to the economic outlook. The increase in oil and gasoline prices earlier this year is expected to affect inflation only temporarily, and the Committee anticipates that subsequently inflation will run at or below the rate that it judges most consistent with its dual mandate. To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014. The Committee also decided to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability. Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Sarah Bloom Raskin; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting against the action was Jeffrey M. Lacker, who does not anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate through late 2014.

2012-03-13

Statement

Information received since the Federal Open Market Committee met in January suggests that the economy has been expanding moderately. Labor market conditions have improved further; the unemployment rate has declined notably in recent months but remains elevated. Household spending and business fixed investment have continued to advance. The housing sector remains depressed. Inflation has been subdued in recent months, although prices of crude oil and gasoline have increased lately. Longer-term inflation expectations have remained stable. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects moderate economic growth over coming quarters and consequently anticipates that the unemployment rate will decline gradually toward levels that the Committee judges to be consistent with its dual mandate. Strains in global financial markets have eased, though they continue to pose significant downside risks to the economic outlook. The recent increase in oil and gasoline prices will push up inflation temporarily, but the Committee anticipates that subsequently inflation will run at or below the rate that it judges most consistent with its dual mandate. To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014. The Committee also decided to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability. Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Sarah Bloom Raskin; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting against the action was Jeffrey M. Lacker, who does not anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate through late 2014.

2012-04-03

Minute

Minutes of the Federal Open Market Committee March 13, 2012 A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, March 13, 2012, at 8:30 a.m. PRESENT: Ben Bernanke, Chairman William C. Dudley, Vice Chairman Elizabeth Duke Jeffrey M. Lacker Dennis P. Lockhart Sandra Pianalto Sarah Bloom Raskin Daniel K. Tarullo John C. Williams Janet L. Yellen James Bullard, Christine Cumming, Charles L. Evans, Esther L. George, and Eric Rosengren, Alternate Members of the Federal Open Market Committee Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, Presidents of the Federal Reserve Banks of Dallas, Minneapolis, and Philadelphia, respectively William B. English, Secretary and Economist Deborah J. Danker, Deputy Secretary Matthew M. Luecke, Assistant Secretary David W. Skidmore, Assistant Secretary Michelle A. Smith, Assistant Secretary Scott G. Alvarez, General Counsel Thomas C. Baxter, Deputy General Counsel Steven B. Kamin, Economist David W. Wilcox, Economist David Altig, Thomas A. Connors, Michael P. Leahy, David Reifschneider, Glenn D. Rudebusch, William Wascher, and John A. Weinberg, Associate Economists Brian Sack, Manager, System Open Market Account Michael S. Gibson, Director, Division of Banking Supervision and Regulation, Board of Governors Nellie Liang, Director, Office of Financial Stability Policy and Research, Board of Governors Jon W. Faust and Andrew T. Levin, Special Advisors to the Board, Office of Board Members, Board of Governors James A. Clouse, Deputy Director, Division of Monetary Affairs, Board of Governors Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors Seth B. Carpenter, Senior Associate Director, Division of Monetary Affairs, Board of Governors Thomas Laubach, Senior Adviser, Division of Research and Statistics, Board of Governors; Ellen E. Meade, Stephen A. Meyer, and Joyce K. Zickler, Senior Advisers, Division of Monetary Affairs, Board of Governors Eric M. Engen, Michael T. Kiley, and Michael G. Palumbo, Associate Directors, Division of Research and Statistics, Board of Governors Edward Nelson, Section Chief, Division of Monetary Affairs, Board of Governors Harvey Rosenblum and Daniel G. Sullivan, Executive Vice Presidents, Federal Reserve Banks of Dallas and Chicago, respectively Craig S. Hakkio, Geoffrey Tootell, and Kei-Mu Yi, Senior Vice Presidents, Federal Reserve Banks of Kansas City, Boston, and Minneapolis, respectively Michael Dotsey, Joseph G. Haubrich, Lorie K. Logan, and David C. Wheelock, Vice Presidents, Federal Reserve Banks of Philadelphia, Cleveland, New York, and St. Louis, respectively Marc Giannoni, Senior Economist, Federal Reserve Bank of New York Developments in Financial Markets and the Federal Reserve's Balance Sheet The Manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets during the period since the Federal Open Market Committee (FOMC) met on January 24–25, 2012. He also reported on System open market operations, including the ongoing reinvestment into agency-guaranteed mortgage-backed securities (MBS) of principal payments received on SOMA holdings of agency debt and agency-guaranteed MBS as well as the operations related to the maturity extension program authorized at the September 20–21, 2011, FOMC meeting. By unanimous vote, the Committee ratified the Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account over the intermeeting period. Staff Review of the Economic Situation The information reviewed at the March 13 meeting suggested that economic activity was expanding moderately. Labor market conditions continued to improve and the unemployment rate declined further, although it remained elevated. Overall consumer price inflation was relatively subdued in recent months. More recently, prices of crude oil and gasoline increased substantially. Measures of long-run inflation expectations remained stable. Private nonfarm employment rose at an appreciably faster average pace in January and February than in the fourth quarter of last year, and declines in total government employment slowed in recent months. The unemployment rate decreased to 8.3 percent in January and stayed at that level in February. Both the rate of long-duration unemployment and the share of workers employed part time for economic reasons continued to be high. Initial claims for unemployment insurance trended lower over the intermeeting period and were at a level consistent with further moderate job gains. Manufacturing production increased considerably in January, and the rate of manufacturing capacity utilization stepped up. Factory output was boosted by a sizable expansion in the production of motor vehicles, but there also were solid and widespread gains in other industries. In February, motor vehicle assemblies remained near the strong pace recorded in January; they were scheduled to edge up, on net, through the second quarter. Broader indicators of manufacturing activity, such as the diffusion indexes of new orders from the national and regional manufacturing surveys, were at levels suggesting moderate increases in factory production in the coming months. Households' real disposable income increased, on balance, in December and January as labor earnings rose solidly. Moreover, households' net worth grew in the fourth quarter of last year and likely was boosted further by gains in equity values thus far this year. Nevertheless, real personal consumption expenditures (PCE) were reported to have been flat in December and January. Although households' purchases of motor vehicles rose briskly, spending for other consumer goods and services was weak. In February, nominal retail sales excluding purchases at motor vehicle and parts outlets increased moderately, while motor vehicle sales continued to climb. Consumer sentiment was little changed in February, and households remained downbeat about both the economic outlook and their own income and finances. Housing market activity improved somewhat in recent months but continued to be restrained by the substantial inventory of foreclosed and distressed properties, tight credit conditions for mortgage loans, and uncertainty about the economic outlook and future home prices. After increasing in December, starts of new single-family homes remained at that higher level in January, likely boosted in part by unseasonably warm weather; in both months, starts ran above permit issuance. Sales of new and existing homes stepped up further in recent months, though they still remained at quite low levels. Home prices were flat, on balance, in December and January. Real business expenditures on equipment and software rose at a notably slower pace in the fourth quarter of last year than earlier in the year. Moreover, nominal orders and shipments of nondefense capital goods declined in January. However, a number of forward-looking indicators of firms' equipment spending improved, including some survey measures of business conditions and capital spending plans. Nominal business spending for nonresidential construction firmed, on net, in December and January, but the level of spending was still subdued, in part reflecting high vacancy rates and tight credit conditions for construction loans. Inventories in most industries looked to be reasonably well aligned with sales in recent months, although stocks of motor vehicles continued to be lean. Data for federal government spending in January and February indicated that real defense expenditures continued to step down after decreasing significantly in the fourth quarter. Real state and local government purchases looked to be declining at a slower pace than last year, as those governments' payrolls edged up in January and February and their nominal construction spending rose a little in January. The U.S. international trade deficit widened in December and January, as imports increased more than exports. The expansion of imports was spread across most categories, with petroleum products and automotive products posting strong gains in January. The rise in exports was supported by shipments of capital goods and automotive products, while exports of consumer goods and industrial supplies declined on average. Data through December indicated that net exports made a moderate negative contribution to the rate of growth in real gross domestic product (GDP) in the fourth quarter of last year. Overall U.S. consumer prices, as measured by the PCE price index, increased at a modest rate in December and January. Consumer energy prices rose in January after decreasing markedly in December, and survey data indicated that gasoline prices moved up considerably in February and early March. Meanwhile, increases in consumer food prices slowed in recent months. Consumer prices excluding food and energy also rose modestly in December and January. Near-term inflation expectations from the Thomson Reuters/University of Michigan Surveys of Consumers were unchanged in February, and longer-term inflation expectations in the survey remained in their recent range. Measures of labor compensation generally indicated that nominal wage gains continued to be subdued. Increases in compensation per hour in the nonfarm business sector picked up somewhat over the four quarters of 2011. However, the employment cost index increased at a more modest pace than the compensation per hour measure over the past year, and the 12-month change in average hourly earnings for all employees remained muted in January and February. Recent indicators suggested some improvement in foreign economic activity early this year after a significant slowing in the fourth quarter of last year. Aggregate output in the euro area contracted in the fourth quarter, but manufacturing purchasing managers indexes (PMIs) improved in January and February relative to their low fourth-quarter readings, and consumer and business confidence edged up. Floods caused steep production declines in the fourth quarter in Thailand and also had negative effects on output in other countries linked through Thai supply chains. However, economic activity in Thailand recovered sharply around year-end, and manufacturing PMIs moved up across Asia through February. Higher prices for energy and food put upward pressure on headline inflation in foreign economies, but measures of core inflation remained subdued. Staff Review of the Financial Situation On balance, U.S. financial conditions became somewhat more supportive of growth over the intermeeting period, and strains in global financial markets eased, as domestic and foreign economic data were generally better than market participants had expected and investors appeared to see diminished downside risks associated with the situation in Europe. Measures of the expected path for the federal funds rate derived from overnight index swap (OIS) rates suggested that the near-term portion of the expected policy rate path was about unchanged, on balance, since the January FOMC meeting, but the path beyond the middle of 2014 shifted down a bit, reportedly reflecting in part the change in the forward rate guidance in the Committee's January statement. On balance, yields on Treasury securities were little changed over the intermeeting period. Indicators of inflation compensation over the next five years edged up, while changes in measures of longer-term inflation compensation were mixed. Conditions in unsecured short-term dollar funding markets improved over the period, especially for financial institutions with European parents. The spread of the three-month London interbank offered rate (LIBOR) over the OIS rate narrowed. In addition, spreads of rates on asset-backed commercial paper over those on AA-rated nonfinancial paper decreased significantly, and the amounts outstanding from programs with European sponsors remained stable. Moreover, the average maturity of unsecured U.S. commercial paper issued by European banks lengthened somewhat over the intermeeting period. Responses to the March 2012 Senior Credit Officer Opinion Survey on Dealer Financing Terms indicated little change, on balance, over the past three months in credit terms for important classes of counterparties. Demand for securities financing was reported to have risen somewhat across asset types, but dealers indicated that the risk appetite of most clients had changed relatively little over the previous three months. Broad U.S. equity price indexes rose significantly over the intermeeting period; equity prices of large banking organizations increased about in line with the broader market. Aggregate earnings per share for firms in the Standard & Poor's 500 index declined in the fourth quarter, but profit margins for large corporations remained wide by historical standards. Reflecting a narrowing of spreads over yields on comparable-maturity Treasury securities, yields on investment- and speculative-grade corporate bonds continued to decline over the period, moving toward the low end of their historical ranges. Prices in the secondary market for syndicated leveraged loans moved up further, supported by continued strong demand from institutional investors. The spreads of yields on A2/P2-rated unsecured commercial paper issued by nonfinancial firms over yields on A1/P1-rated issues narrowed slightly on balance. Bond issuance by financial firms was strong in January and February, likely reflecting in part the refinancing of maturing debt that had been issued during the financial crisis under the Federal Deposit Insurance Corporation's Temporary Liquidity Guarantee Program. The issuance of bonds by domestic nonfinancial firms was solid in recent months, and indicators of credit quality remained firm. Growth of commercial and industrial (C&I) loans continued to be substantial and was widespread across domestic banks, though holdings of such loans at U.S. branches and agencies of European banks decreased further. Financing conditions in the commercial real estate sector continued to be tight, and issuance of commercial mortgage-backed securities remained low in the fourth quarter of last year. Gross public equity issuance by nonfinancial firms was still solid in January and February, boosted by continued strength in initial public offerings. Share repurchases and cash-financed mergers by nonfinancial firms maintained their strength in the fourth quarter, leading to a sharp decline in net equity issuance. Although mortgage rates remained near their historical lows, conditions in residential mortgage markets generally remained depressed. Consumer credit rose in recent months, with the growth in nonrevolving credit led by continued rapid expansion of government-originated student loans. Issuance of consumer credit asset-backed securities remained at moderate levels in the fourth quarter of 2011 and in early 2012. Gross long-term issuance of municipal bonds was subdued in the first two months of this year. Meanwhile, spreads on credit default swaps for debt issued by states were roughly flat over the intermeeting period. Bank credit rose at a modest pace, on average, in January and February, mainly reflecting strong increases in securities holdings and C&I loans. Commercial real estate loans held by banks continued to decline, while noncore loans--a category that includes lending to nonbank financial institutions--grew at a slower pace than in previous months. The aggregate credit quality of loans on banks' books continued to improve across most asset classes in the fourth quarter. M2 advanced at a rapid pace in January, apparently reflecting year-end effects, but its growth slowed in February. The rise in M2 was mainly attributable to continued strength in liquid deposits, reflecting investors' preferences for safe and liquid assets as well as very low yields on short-term instruments outside M2. Currency expanded robustly, and the monetary base also grew significantly over January and February. Foreign equity markets ended the period higher, particularly in Japan, and benchmark sovereign bond yields declined. Spreads of yields on euro-area peripheral sovereign debt over those on German bunds generally continued to narrow, and foreign corporate credit spreads also declined further. The staff's broad nominal index of the foreign exchange value of the dollar moved down modestly over the intermeeting period. Funding conditions for euro-area banks eased over the period, as the European Central Bank (ECB) conducted its second three-year refinancing operation and widened the pool of eligible collateral for refinancing operations. Spreads of three-month euro LIBOR over the OIS rate narrowed, on balance, and European banks' issuance of unsecured senior debt and covered bonds increased. Dollar funding pressures continued to diminish, and the implied cost of dollar funding through the foreign exchange swap market fell moderately further. Reflecting the improved conditions in funding markets, demand for dollars at ECB lending operations declined and the outstanding amounts drawn under the Federal Reserve's dollar liquidity swap lines with other foreign central banks remained small. Several other central banks in advanced and emerging market economies eased policy further. In particular, the Bank of England increased the size of its existing gilt purchase program in February, and the Bank of Japan scaled up its Asset Purchase Program. The Bank of Japan also introduced a 1 percent inflation goal. Staff Economic Outlook In the economic projection prepared for the March FOMC meeting, the staff revised up its near-term forecast for real GDP growth a little. Although the recent data on aggregate spending were, on balance, about in line with the staff's expectations at the time of the previous forecast, indicators of labor market conditions and production improved somewhat more than the staff had anticipated. In addition, the decline in the unemployment rate over the past year was larger than what seemed consistent with the modest reported rate of real GDP growth. Against this backdrop, the staff reduced its estimate of the level of potential output, yielding a measure of the current output gap that was a little narrower and better aligned with the staff's estimate of labor market slack. In its March forecast, the staff's projection for real GDP growth over the medium term was somewhat higher than the one presented in January, mostly reflecting an improved outlook for economic activity abroad, a lower foreign exchange value for the dollar, and a higher projected path of equity prices. Nevertheless, the staff continued to forecast that real GDP growth would pick up only gradually in 2012 and 2013, supported by accommodative monetary policy, easing credit conditions, and improvements in consumer and business sentiment. The wide margin of slack in product and labor markets was expected to decrease gradually over the projection period, but the unemployment rate was expected to remain elevated at the end of 2013. The staff also revised up its forecast for inflation a bit compared with the projection prepared for the January FOMC meeting, reflecting recent data indicating higher paths for the prices of oil, other commodities, and imports, along with a somewhat narrower margin of economic slack in the March forecast. However, with energy prices expected to level out in the second half of this year, substantial resource slack persisting over the forecast period, and stable long-run inflation expectations, the staff continued to project that inflation would be subdued in 2012 and 2013. Participants' Views on Current Conditions and the Economic Outlook In their discussion of the economic situation and outlook, meeting participants agreed that the information received since the Committee's previous meeting, while mixed, had been positive, on balance, and suggested that the economy had been expanding moderately. Labor market conditions had improved further: Payroll employment had continued to expand, and the unemployment rate had declined notably in recent months. Still, unemployment remained elevated. Household spending and business fixed investment had continued to advance. Despite signs of improvement or stabilization in some local housing markets, most participants agreed that the housing sector remained depressed. Inflation had been subdued in recent months, although prices of crude oil and gasoline had increased of late. Longer-term inflation expectations had remained stable, and most meeting participants saw little evidence of cost pressures. With respect to the economic outlook, participants generally saw the intermeeting news as suggesting that economic growth over coming quarters would continue to be moderate and that the unemployment rate would decline gradually toward levels that the Committee judges to be consistent with its dual mandate. While a few participants indicated that their expectations for real GDP growth for 2012 had risen somewhat, most participants did not interpret the recent economic and financial information as pointing to a material revision to the outlook for 2013 and 2014. Financial conditions had improved notably since the January meeting: Equity prices were higher and risk spreads had declined. Nonetheless, a number of factors continued to be seen as likely to restrain the pace of economic expansion; these included slower growth in some foreign economies, prospective fiscal tightening in the United States, the weak housing market, further household deleveraging, and high levels of uncertainty among households and businesses. Participants continued to expect most of the factors restraining economic expansion to ease over time and so anticipated that the recovery would gradually gain strength. In addition, participants noted that recent policy actions in the euro area had helped reduce financial stresses and lower downside risks in the short term; however, increased volatility in financial markets remained a possibility if measures to address the longer-term fiscal and banking issues in the euro area were not put in place in a timely fashion. Inflation had been subdued of late, although the recent increase in crude oil and gasoline prices would push up inflation temporarily. With unemployment expected to remain elevated, and with longer-term inflation expectations stable, most participants expected that inflation subsequently would run at or below the 2 percent rate that the Committee judges most consistent with its statutory mandate over the longer run. In discussing the household sector, meeting participants generally commented that consumer spending had increased moderately of late. While a few participants suggested that recent improvements in labor market conditions and the easing in financial conditions could help lay the groundwork for a strengthening in the pace of household spending, several other participants pointed to factors that would likely restrain consumption: Growth in real disposable income was still sluggish, and consumer sentiment, despite some improvement since last summer, remained weak. A number of participants viewed the recent run-up in petroleum prices as likely to limit gains in consumer spending on non-energy items for a time; a couple of participants noted, however, that the unseasonably warm weather and the declining price of natural gas had helped cushion the effect of higher oil and gasoline prices on consumers' overall energy bills. Most participants agreed that, while recent housing-sector data had shown some tentative indications of upward movement, the level of activity in that sector remained depressed and was likely to recover only slowly over time. One participant, while agreeing that the housing market had not yet turned the corner, was more optimistic about the potential for a stronger recovery in the market in light of signs of reduced inventory overhang and stronger demand in some regions. Reports from business contacts indicated that activity in the manufacturing, energy, and agriculture sectors continued to advance in recent months. In the retail sector, sales of new autos had strengthened, but reports from other retailers were mixed. A number of businesses had indicated that they were seeing some improvement in demand and that they had become somewhat more optimistic of late, with some reporting that they were adding to capacity. But most firms reportedly remained fairly cautious--particularly on hiring decisions--and continued to be uncertain about the strength of the recovery. Participants touched on the outlook for fiscal policy and the export sector. Assessments of the outlook for government revenues and expenditures were mixed. State and local government spending had recently shown modest growth, following a lengthy period of contraction, and declines in public-sector employment appeared to have abated of late. However, it was noted that if agreement was not reached on a longer-term plan for the federal budget, an abrupt and sharp fiscal tightening would occur at the start of 2013. A number of participants observed that exports continued to be a positive factor for U.S. growth, while noting risks to the export picture from economic weakness in Europe or a greater-than-expected slowdown in China and emerging Asia. Participants generally observed the continued improvement in labor market conditions since the January meeting. A couple of participants stated that the progress suggested by the payroll numbers was also apparent in a broad array of labor market indicators, and others noted survey measures suggesting further solid gains in employment going forward. One participant pointed to inflation readings and a high rate of long-duration unemployment as signs that the current level of output may be much closer to potential than had been thought, and a few others cited a weaker path of potential output as a characteristic of the present expansion. However, a number of participants judged that the labor market currently featured substantial slack. In support of that view, various indicators were cited, including aggregate hours, which during the recession had exhibited a decline that was particularly severe by historical standards and remained well below the series' pre-recession peak; the high number of persons working part time for economic reasons; and low ratios of job openings to unemployment and of employment to population. Most participants noted that the incoming information on components of final spending had exhibited less strength than the indicators of employment and production. Some participants expressed the view that the recent increases in payrolls likely reflected, in part, a reversal of the sharp cuts in employment during the recession, a scenario consistent with the weak readings on productivity growth of late. In this view, the recent pace of employment gains might not be sustained if the growth rate of spending did not pick up. Several participants noted that the unseasonably warm weather of recent months added one more element of uncertainty to the interpretation of incoming data, and that this factor might account for a portion of the recent improvement in indicators of employment and housing. In a contrasting view, the improvements registered in labor market indicators could be seen as raising the likelihood that GDP data for the recent period would undergo a significant upward revision. Many participants noted that strains in global financial markets had eased somewhat, and that financial conditions were more supportive of economic growth than at the time of the January meeting. Among the evidence cited were higher equity prices and better conditions in corporate credit markets, especially the markets for high-yield bonds and leveraged loans. Banking contacts were reporting steady, though modest, growth in C&I loans. Many meeting participants believed that policy actions in the euro area, notably the Greek debt swap and the ECB's longer-term refinancing operations, had helped to ease strains in financial markets and reduced the downside risks to the U.S. and global economic outlook. Nonetheless, a number of participants noted that a longer-term solution to the banking and fiscal problems in the euro area would require substantial further adjustment in the banking and public sectors. Participants saw the possibility of disruptions in global financial markets as continuing to pose a risk to growth. While the recent readings on consumer price inflation had been subdued, participants agreed that inflation in the near term would be pushed up by rising oil and gasoline prices. A few participants noted that the crude oil price increases in the latter half of 2010 and the early part of 2011 had been part of a broad-based rise in commodity prices; in contrast, non-energy commodity prices had been more stable of late, which suggested that the recent upward pressure on oil prices was principally due to geopolitical concerns rather than global economic growth. A couple of participants noted that recent readings on unit labor costs had shown a larger increase than earlier, but other participants pointed to other measures of labor compensation that continued to show modest increases. With longer-run inflation expectations still well anchored, most participants anticipated that after the temporary effect of the rise in oil and gasoline prices had run its course, inflation would be at or below the 2 percent rate that they judge most consistent with the Committee's dual mandate. Indeed, a few participants were concerned that, with the persistence of considerable resource slack, inflation might be below the mandate-consistent rate for some time. Other participants, however, were worried that inflation pressures could increase as the expansion continued; these participants argued that, particularly in light of the recent rise in oil and gasoline prices, maintaining the current highly accommodative stance of monetary policy over the medium run could erode the stability of inflation expectations and risk higher inflation. Committee Policy Action Members viewed the information on U.S. economic activity received over the intermeeting period as suggesting that the economy had been expanding moderately and generally agreed that the economic outlook, while a bit stronger overall, was broadly similar to that at the time of their January meeting. Labor market conditions had continued to improve and unemployment had declined in recent months, but almost all members saw the unemployment rate as still elevated relative to levels that they viewed as consistent with the Committee's mandate over the longer run. With the economy facing continuing headwinds, members generally expected a moderate pace of economic growth over coming quarters, with gradual further declines in the unemployment rate. Strains in global financial markets, while having eased since January, continued to pose significant downside risks to economic activity. Recent monthly readings on inflation had been subdued, and longer-term inflation expectations remained stable. Against that backdrop, members generally anticipated that the recent increase in oil and gasoline prices would push up inflation temporarily, but that subsequently inflation would run at or below the rate that the Committee judges most consistent with its mandate. In their discussion of monetary policy for the period ahead, members agreed that it would be appropriate to maintain the existing highly accommodative stance of monetary policy. In particular, they agreed to keep the target range for the federal funds rate at 0 to 1/4 percent, to continue the program of extending the average maturity of the Federal Reserve's holdings of securities as announced in September, and to retain the existing policies regarding the reinvestment of principal payments from Federal Reserve holdings of securities. With respect to the statement to be released following the meeting, members agreed that only relatively small modifications to the first two paragraphs were needed to reflect the incoming economic data, the improvement in financial conditions, and the modest changes to the economic outlook. With the economic outlook over the medium term not greatly changed, almost all members again agreed to indicate that the Committee expects to maintain a highly accommodative stance for monetary policy and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014. Several members continued to anticipate, as in January, that the unemployment rate would still be well above their estimates of its longer-term normal level, and inflation would be at or below the Committee's longer-run objective, in late 2014. It was noted that the Committee's forward guidance is conditional on economic developments, and members concurred that the date given in the statement would be subject to revision in response to significant changes in the economic outlook. While recent employment data had been encouraging, a number of members perceived a nonnegligible risk that improvements in employment could diminish as the year progressed, as had occurred in 2010 and 2011, and saw this risk as reinforcing the case for leaving the forward guidance unchanged at this meeting. In contrast, one member judged that maintaining the current degree of policy accommodation much beyond this year would likely be inappropriate; that member anticipated that a tightening of monetary policy would be necessary well before the end of 2014 in order to keep inflation close to the Committee's 2 percent objective. The Committee also stated that it is prepared to adjust the size and composition of its securities holdings as appropriate to promote a stronger economic recovery in a context of price stability. A couple of members indicated that the initiation of additional stimulus could become necessary if the economy lost momentum or if inflation seemed likely to remain below its mandate-consistent rate of 2 percent over the medium run. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to continue the maturity extension program it began in September to purchase, by the end of June 2012, Treasury securities with remaining maturities of approximately 6 years to 30 years with a total face value of $400 billion, and to sell Treasury securities with remaining maturities of 3 years or less with a total face value of $400 billion. The Committee also directs the Desk to maintain its existing policies of rolling over maturing Treasury securities into new issues and of reinvesting principal payments on all agency debt and agency mortgage-backed securities in the System Open Market Account in agency mortgage-backed securities in order to maintain the total face value of domestic securities at approximately $2.6 trillion. The Committee directs the Desk to engage in dollar roll transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability." The vote encompassed approval of the statement below to be released at 2:15 p.m.: "Information received since the Federal Open Market Committee met in January suggests that the economy has been expanding moderately. Labor market conditions have improved further; the unemployment rate has declined notably in recent months but remains elevated. Household spending and business fixed investment have continued to advance. The housing sector remains depressed. Inflation has been subdued in recent months, although prices of crude oil and gasoline have increased lately. Longer-term inflation expectations have remained stable. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects moderate economic growth over coming quarters and consequently anticipates that the unemployment rate will decline gradually toward levels that the Committee judges to be consistent with its dual mandate. Strains in global financial markets have eased, though they continue to pose significant downside risks to the economic outlook. The recent increase in oil and gasoline prices will push up inflation temporarily, but the Committee anticipates that subsequently inflation will run at or below the rate that it judges most consistent with its dual mandate. To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014. The Committee also decided to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability." Voting for this action: Ben Bernanke, William C. Dudley, Elizabeth Duke, Dennis P. Lockhart, Sandra Pianalto, Sarah Bloom Raskin, Daniel K. Tarullo, John C. Williams, and Janet L. Yellen. Voting against this action: Jeffrey M. Lacker. Mr. Lacker dissented because he did not agree that economic conditions were likely to warrant exceptionally low levels of the federal funds rate at least through late 2014. In his view, with inflation close to the Committee's objective of 2 percent, the economy expanding at a moderate pace, and downside risks somewhat diminished, the federal funds rate will most likely need to rise considerably sooner to prevent the emergence of inflationary pressures. Mr. Lacker continues to prefer to provide forward guidance regarding future Committee policy actions through the inclusion of FOMC participants' projections of the federal funds rate in the Summary of Economic Projections (SEP). Monetary Policy Communications As it noted in its statement of principles regarding longer-run goals and monetary policy strategy released in January, the Committee seeks to explain its monetary policy decisions to the public as clearly as possible. With that goal in mind, participants discussed a range of additional steps that the Committee might take to help the public better understand the linkages between the evolving economic outlook and the Federal Reserve's monetary policy decisions, and thus the conditionality in the Committee's forward guidance. The purpose of the discussion was to explore potentially promising approaches for further enhancing FOMC communications; no decisions on this topic were planned for this meeting and none were taken. Participants discussed ways in which the Committee might include, in its postmeeting statements, additional qualitative or quantitative information that could convey a sense of how the Committee might adjust policy in response to changes in the economic outlook. Participants also discussed whether modifications to the SEP that the Committee releases four times per year could be helpful in clarifying the linkages between the economic outlook and the Committee's monetary policy decisions. In addition, several participants suggested that it could be helpful to discuss at a future meeting some alternative economic scenarios and the monetary policy responses that might be seen as appropriate under each one, in order to clarify the Committee's likely behavior in different contingencies. Finally, participants observed that the Committee introduced several important enhancements to its policy communications over the past year or so; these included the Chairman's postmeeting press conferences as well as changes to the FOMC statement and the SEP. Against this backdrop, some participants noted that additional experience with the changes implemented to date could be helpful in evaluating potential further enhancements. It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, April 24-25, 2012. The meeting adjourned at 4:10 p.m. on March 13, 2012. Notation Vote By notation vote completed on February 14, 2012, the Committee unanimously approved the minutes of the FOMC meeting held on January 24-25, 2012. _____________________________ William B. English Secretary

2012-01-25

Statement

Information received since the Federal Open Market Committee met in December suggests that the economy has been expanding moderately, notwithstanding some slowing in global growth. While indicators point to some further improvement in overall labor market conditions, the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment has slowed, and the housing sector remains depressed. Inflation has been subdued in recent months, and longer-term inflation expectations have remained stable. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects economic growth over coming quarters to be modest and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that over coming quarters, inflation will run at levels at or below those consistent with the Committee's dual mandate. To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy.  In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014. The Committee also decided to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability. Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Sarah Bloom Raskin; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen.  Voting against the action was Jeffrey M. Lacker, who preferred to omit the description of the time period over which economic conditions are likely to warrant exceptionally low levels of the federal funds rate.

2012-02-15

Minute

Minutes of the Federal Open Market Committee January 24-25, 2012 A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors in Washington, D.C., on Tuesday, January 24, 2012, at 10:00 a.m., and continued on Wednesday, January 25, 2012, at 8:30 a.m. PRESENT: Ben Bernanke, Chairman William C. Dudley, Vice Chairman Elizabeth Duke Jeffrey M. Lacker Dennis P. Lockhart Sandra Pianalto Sarah Bloom Raskin Daniel K. Tarullo John C. Williams Janet L. Yellen James Bullard, Christine Cumming, Charles L. Evans, Esther L. George, and Eric Rosengren, Alternate Members of the Federal Open Market Committee Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, Presidents of the Federal Reserve Banks of Dallas, Minneapolis, and Philadelphia, respectively William B. English, Secretary and Economist Deborah J. Danker, Deputy Secretary Matthew M. Luecke, Assistant Secretary David W. Skidmore, Assistant Secretary Michelle A. Smith, Assistant Secretary Scott G. Alvarez, General Counsel Thomas C. Baxter, Deputy General Counsel Steven B. Kamin, Economist David W. Wilcox, Economist David Altig, Thomas A. Connors, Michael P. Leahy, William Nelson, Simon Potter, David Reifschneider, Glenn D. Rudebusch, and William Wascher, Associate Economists Brian Sack, Manager, System Open Market Account Michael S. Gibson, Director, Division of Banking Supervision and Regulation, Board of Governors Nellie Liang, Director, Office of Financial Stability Policy and Research, Board of Governors Jon W. Faust and Andrew T. Levin, Special Advisors to the Board, Office of Board Members, Board of Governors James A. Clouse, Deputy Director, Division of Monetary Affairs, Board of Governors Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors Daniel E. Sichel, Senior Associate Director, Division of Research and Statistics, Board of Governors Ellen E. Meade, Stephen A. Meyer, and Joyce K. Zickler, Senior Advisers, Division of Monetary Affairs, Board of Governors; Lawrence Slifman, Senior Adviser, Division of Research and Statistics, Board of Governors Eric M. Engen1 and Daniel M. Covitz, Associate Directors, Division of Research and Statistics, Board of Governors; Trevor A. Reeve, Associate Director, Division of International Finance, Board of Governors Joshua Gallin,1 Deputy Associate Director, Division of Research and Statistics, Board of Governors David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors Chiara Scotti, Senior Economist, Division of International Finance, Board of Governors; Louise Sheiner, Senior Economist, Division of Research and Statistics, Board of Governors Lyle Kumasaka, Senior Financial Analyst, Division of Monetary Affairs, Board of Governors Kurt F. Lewis, Economist, Division of Monetary Affairs, Board of Governors Randall A. Williams, Records Management Analyst, Division of Monetary Affairs, Board of Governors Kenneth C. Montgomery, First Vice President, Federal Reserve Bank of Boston Jeff Fuhrer, Loretta J. Mester, Harvey Rosenblum, and Daniel G. Sullivan, Executive Vice Presidents, Federal Reserve Banks of Boston, Philadelphia, Dallas, and Chicago, respectively Craig S. Hakkio, Mark E. Schweitzer, Christopher J. Waller, and Kei-Mu Yi, Senior Vice Presidents, Federal Reserve Banks of Kansas City, Cleveland, St. Louis, and Minneapolis, respectively John Duca2 and Andrew Haughwout,2 Vice Presidents, Federal Reserve Banks of Dallas and New York, respectively Julie Ann Remache, Assistant Vice President, Federal Reserve Bank of New York Robert L. Hetzel, Senior Economist, Federal Reserve Bank of Richmond Daniel Cooper,2 Economist, Federal Reserve Bank of Boston Role of Financial Conditions in Economic Recovery: Lending and Leverage Staff summarized research projects being conducted across the Federal Reserve System on the effects of changes in lending practices and household leverage on consumer spending in recent years. These projects provided a range of views regarding the size and importance of such effects. An analysis employing aggregate time-series data indicated that changes in income, household assets and liabilities, and credit availability can largely account for the movements in aggregate consumption seen since the mid-1990s; this finding suggests that changes in credit conditions may have been an important factor driving changes in the saving rate in recent years. A second analysis used data on borrowing, debt repayments, and other credit factors for individual borrowers; this study found that movements in leverage--resulting from voluntary loan repayments and from loan charge-offs--have had a substantial effect on the cash flow of many households over time, and thus presumably on their spending. However, a third study, which employed household-level data, suggested that movements in consumption before, during, and after the recession were driven primarily by employment, income, and net worth, leaving little variation to be explained by changes in leverage and credit availability. In their discussion following the staff presentation, several meeting participants considered possible reasons for the differing results of the various analyses; participants also noted contrasts between these findings and those reported in some academic research. Several possible explanations for the varying conclusions were discussed, including differences across studies in model specification and data, as well as differences in the definition of deleveraging. In addition, it was noted that data limitations make it difficult to reach firm conclusions on this issue, at least at this time. Participants also considered the possible influence on aggregate consumer spending of changes in real interest rates and the distribution of income, the potential for policy actions to affect the fundamental factors driving household saving, and whether households' spending behavior is being affected by concerns about the future of Social Security. Annual Organizational Matters In the agenda for this meeting, it was reported that advices of the election of the following members and alternate members of the Federal Open Market Committee for a term beginning January 24, 2012, had been received and that these individuals had executed their oaths of office. The elected members and alternate members were as follows: William C. Dudley, President of the Federal Reserve Bank of New York, with Christine Cumming, First Vice President of the Federal Reserve Bank of New York, as alternate. Jeffrey M. Lacker, President of the Federal Reserve Bank of Richmond, with Eric Rosengren, President of the Federal Reserve Bank of Boston, as alternate. Sandra Pianalto, President of the Federal Reserve Bank of Cleveland, with Charles L. Evans, President of the Federal Reserve Bank of Chicago, as alternate. Dennis P. Lockhart, President of the Federal Reserve Bank of Atlanta, with James Bullard, President of the Federal Reserve Bank of St. Louis, as alternate. John C. Williams, President of the Federal Reserve Bank of San Francisco, with Esther L. George, President of the Federal Reserve Bank of Kansas City, as alternate. By unanimous vote, the following officers of the Federal Open Market Committee were selected to serve until the selection of their successors at the first regularly scheduled meeting of the Committee in 2013: Ben Bernanke Chairman William C. Dudley Vice Chairman William B. English Secretary and Economist Deborah J. Danker Deputy Secretary Matthew M. Luecke Assistant Secretary David W. Skidmore Assistant Secretary Michelle A. Smith Assistant Secretary Scott G. Alvarez General Counsel Thomas C. Baxter Deputy General Counsel Richard M. Ashton Assistant General Counsel Steven B. Kamin Economist David W. Wilcox Economist David Altig Thomas A. Connors Michael P. Leahy William Nelson Simon Potter David Reifschneider Glenn D. Rudebusch Mark S. Sniderman William Wascher John A. Weinberg Associate Economists By unanimous vote, the Federal Reserve Bank of New York was selected to execute transactions for the System Open Market Account. By unanimous vote, Brian Sack was selected to serve at the pleasure of the Committee as Manager, System Open Market Account, on the understanding that his selection was subject to being satisfactory to the Federal Reserve Bank of New York. Secretary's note: Advice subsequently was received that the selection of Mr. Sack as Manager was satisfactory to the Board of Directors of the Federal Reserve Bank of New York. By unanimous vote, the Authorization for Domestic Open Market Operations was amended to allow lending of securities on longer than an overnight basis to accommodate weekend, holiday, and similar trading conventions. The Guidelines for the Conduct of System Open Market Operations in Federal-Agency Issues remained suspended. AUTHORIZATION FOR DOMESTIC OPEN MARKET OPERATIONS (Amended January 24, 2012) 1. The Federal Open Market Committee authorizes and directs the Federal Reserve Bank of New York, to the extent necessary to carry out the most recent domestic policy directive adopted at a meeting of the Committee: A. To buy or sell U.S. Government securities, including securities of the Federal Financing Bank, and securities that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the United States in the open market, from or to securities dealers and foreign and international accounts maintained at the Federal Reserve Bank of New York, on a cash, regular, or deferred delivery basis, for the System Open Market Account at market prices, and, for such Account, to exchange maturing U.S. Government and Federal agency securities with the Treasury or the individual agencies or to allow them to mature without replacement; B. To buy or sell in the open market U.S. Government securities, and securities that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the United States, for the System Open Market Account under agreements to resell or repurchase such securities or obligations (including such transactions as are commonly referred to as repo and reverse repo transactions) in 65 business days or less, at rates that, unless otherwise expressly authorized by the Committee, shall be determined by competitive bidding, after applying reasonable limitations on the volume of agreements with individual counterparties. 2. In order to ensure the effective conduct of open market operations, the Federal Open Market Committee authorizes the Federal Reserve Bank of New York to use agents in agency MBS-related transactions. 3. In order to ensure the effective conduct of open market operations, the Federal Open Market Committee authorizes the Federal Reserve Bank of New York to lend on an overnight basis U.S. Government securities and securities that are direct obligations of any agency of the United States, held in the System Open Market Account, to dealers at rates that shall be determined by competitive bidding. The Federal Reserve Bank of New York shall set a minimum lending fee consistent with the objectives of the program and apply reasonable limitations on the total amount of a specific issue that may be auctioned and on the amount of securities that each dealer may borrow. The Federal Reserve Bank of New York may reject bids which could facilitate a dealer's ability to control a single issue as determined solely by the Federal Reserve Bank of New York. The Federal Reserve Bank of New York may lend securities on longer than an overnight basis to accommodate weekend, holiday, and similar trading conventions. 4. In order to ensure the effective conduct of open market operations, while assisting in the provision of short-term investments for foreign and international accounts maintained at the Federal Reserve Bank of New York and accounts maintained at the Federal Reserve Bank of New York as fiscal agent of the United States pursuant to Section 15 of the Federal Reserve Act, the Federal Open Market Committee authorizes and directs the Federal Reserve Bank of New York: A. for System Open Market Account, to sell U.S. Government securities, and securities that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the United States, to such accounts on the bases set forth in paragraph 1.A under agreements providing for the resale by such accounts of those securities in 65 business days or less on terms comparable to those available on such transactions in the market; and B. for New York Bank account, when appropriate, to undertake with dealers, subject to the conditions imposed on purchases and sales of securities in paragraph l.B, repurchase agreements in U.S. Government securities, and securities that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the United States, and to arrange corresponding sale and repurchase agreements between its own account and such foreign, international, and fiscal agency accounts maintained at the Bank. Transactions undertaken with such accounts under the provisions of this paragraph may provide for a service fee when appropriate. 5. In the execution of the Committee's decision regarding policy during any intermeeting period, the Committee authorizes and directs the Federal Reserve Bank of New York, upon the instruction of the Chairman of the Committee, to adjust somewhat in exceptional circumstances the degree of pressure on reserve positions and hence the intended federal funds rate and to take actions that result in material changes in the composition and size of the assets in the System Open Market Account other than those anticipated by the Committee at its most recent meeting. Any such adjustment shall be made in the context of the Committee's discussion and decision at its most recent meeting and the Committee's long-run objectives for price stability and sustainable economic growth, and shall be based on economic, financial, and monetary developments during the intermeeting period. Consistent with Committee practice, the Chairman, if feasible, will consult with the Committee before making any adjustment. The Committee voted to reaffirm the Authorization for Foreign Currency Operations, the Foreign Currency Directive, and the Procedural Instructions with Respect to Foreign Currency Operations as shown below. The votes to reaffirm these documents included approval of the System's warehousing agreement with the U.S. Treasury. Mr. Lacker dissented in the votes on the Authorization for Foreign Currency Operations and the Foreign Currency Directive to indicate his opposition to foreign currency intervention by the Federal Reserve. In his view, such intervention would be ineffective if it did not also signal a shift in domestic monetary policy; and if it did signal such a shift, it could potentially compromise the Federal Reserve's monetary policy independence. AUTHORIZATION FOR FOREIGN CURRENCY OPERATIONS (Reaffirmed January 24, 2012) 1. The Federal Open Market Committee authorizes and directs the Federal Reserve Bank of New York, for System Open Market Account, to the extent necessary to carry out the Committee's foreign currency directive and express authorizations by the Committee pursuant thereto, and in conformity with such procedural instructions as the Committee may issue from time to time: A. To purchase and sell the following foreign currencies in the form of cable transfers through spot or forward transactions on the open market at home and abroad, including transactions with the U.S. Treasury, with the U.S. Exchange Stabilization Fund established by Section 10 of the Gold Reserve Act of 1934, with foreign monetary authorities, with the Bank for International Settlements, and with other international financial institutions: Australian dollars Brazilian reais Canadian dollars Danish kroner euro Japanese yen Korean won Mexican pesos New Zealand dollars Norwegian kroner Pounds sterling Singapore dollars Swedish kronor Swiss francs B. To hold balances of, and to have outstanding forward contracts to receive or to deliver, the foreign currencies listed in paragraph A above. C. To draw foreign currencies and to permit foreign banks to draw dollars under the reciprocal currency arrangements listed in paragraph 2 below, provided that drawings by either party to any such arrangement shall be fully liquidated within 12 months after any amount outstanding at that time was first drawn, unless the Committee, because of exceptional circumstances, specifically authorizes a delay. D. To maintain an overall open position in all foreign currencies not exceeding $25.0 billion. For this purpose, the overall open position in all foreign currencies is defined as the sum (disregarding signs) of net positions in individual currencies, excluding changes in dollar value due to foreign exchange rate movements and interest accruals. The net position in a single foreign currency is defined as holdings of balances in that currency, plus outstanding contracts for future receipt, minus outstanding contracts for future delivery of that currency, i.e., as the sum of these elements with due regard to sign. 2. The Federal Open Market Committee directs the Federal Reserve Bank of New York to maintain reciprocal currency arrangements ("swap" arrangements) for the System Open Market Account for periods up to a maximum of 12 months with the following foreign banks, which are among those designated by the Board of Governors of the Federal Reserve System under Section 214.5 of Regulation N, Relations with Foreign Banks and Bankers, and with the approval of the Committee to renew such arrangements on maturity: Foreign bank Amount of arrangement (millions of dollars equivalent) Bank of Canada 2,000 Bank of Mexico 3,000 Any changes in the terms of existing swap arrangements, and the proposed terms of any new arrangements that may be authorized, shall be referred for review and approval to the Committee. 3. All transactions in foreign currencies undertaken under paragraph 1.A. above shall, unless otherwise expressly authorized by the Committee, be at prevailing market rates. For the purpose of providing an investment return on System holdings of foreign currencies or for the purpose of adjusting interest rates paid or received in connection with swap drawings, transactions with foreign central banks may be undertaken at non-market exchange rates. 4. It shall be the normal practice to arrange with foreign central banks for the coordination of foreign currency transactions. In making operating arrangements with foreign central banks on System holdings of foreign currencies, the Federal Reserve Bank of New York shall not commit itself to maintain any specific balance, unless authorized by the Federal Open Market Committee. Any agreements or understandings concerning the administration of the accounts maintained by the Federal Reserve Bank of New York with the foreign banks designated by the Board of Governors under Section 214.5 of Regulation N shall be referred for review and approval to the Committee. 5. Foreign currency holdings shall be invested to ensure that adequate liquidity is maintained to meet anticipated needs and so that each currency portfolio shall generally have an average duration of no more than 18 months (calculated as Macaulay duration). Such investments may include buying or selling outright obligations of, or fully guaranteed as to principal and interest by, a foreign government or agency thereof; buying such securities under agreements for repurchase of such securities; selling such securities under agreements for the resale of such securities; and holding various time and other deposit accounts at foreign institutions. In addition, when appropriate in connection with arrangements to provide investment facilities for foreign currency holdings, U.S. Government securities may be purchased from foreign central banks under agreements for repurchase of such securities within 30 calendar days. 6. All operations undertaken pursuant to the preceding paragraphs shall be reported promptly to the Foreign Currency Subcommittee and the Committee. The Foreign Currency Subcommittee consists of the Chairman and Vice Chairman of the Committee, the Vice Chairman of the Board of Governors, and such other member of the Board as the Chairman may designate (or in the absence of members of the Board serving on the Subcommittee, other Board members designated by the Chairman as alternates, and in the absence of the Vice Chairman of the Committee, the Vice Chairman's alternate). Meetings of the Subcommittee shall be called at the request of any member, or at the request of the Manager, System Open Market Account ("Manager"), for the purposes of reviewing recent or contemplated operations and of consulting with the Manager on other matters relating to the Manager's responsibilities. At the request of any member of the Subcommittee, questions arising from such reviews and consultations shall be referred for determination to the Federal Open Market Committee. 7. The Chairman is authorized: A. With the approval of the Committee, to enter into any needed agreement or understanding with the Secretary of the Treasury about the division of responsibility for foreign currency operations between the System and the Treasury; B. To keep the Secretary of the Treasury fully advised concerning System foreign currency operations, and to consult with the Secretary on policy matters relating to foreign currency operations; C. From time to time, to transmit appropriate reports and information to the National Advisory Council on International Monetary and Financial Policies. 8. Staff officers of the Committee are authorized to transmit pertinent information on System foreign currency operations to appropriate officials of the Treasury Department. 9. All Federal Reserve Banks shall participate in the foreign currency operations for System Account in accordance with paragraph 3G(1) of the Board of Governors' Statement of Procedure with Respect to Foreign Relationships of Federal Reserve Banks dated January 1, 1944. FOREIGN CURRENCY DIRECTIVE (Reaffirmed January 24, 2012) 1. System operations in foreign currencies shall generally be directed at countering disorderly market conditions, provided that market exchange rates for the U.S. dollar reflect actions and behavior consistent with IMF Article IV, Section 1. 2. To achieve this end the System shall: A. Undertake spot and forward purchases and sales of foreign exchange. B. Maintain reciprocal currency ("swap") arrangements with selected foreign central banks. C. Cooperate in other respects with central banks of other countries and with international monetary institutions. 3. Transactions may also be undertaken: A. To adjust System balances in light of probable future needs for currencies. B. To provide means for meeting System and Treasury commitments in particular currencies, and to facilitate operations of the Exchange Stabilization Fund. C. For such other purposes as may be expressly authorized by the Committee. 4. System foreign currency operations shall be conducted: A. In close and continuous consultation and cooperation with the United States Treasury; B. In cooperation, as appropriate, with foreign monetary authorities; and C. In a manner consistent with the obligations of the United States in the International Monetary Fund regarding exchange arrangements under IMF Article IV. PROCEDURAL INSTRUCTIONS WITH RESPECT TO FOREIGN CURRENCY OPERATIONS (Reaffirmed January 24, 2012) In conducting operations pursuant to the authorization and direction of the Federal Open Market Committee as set forth in the Authorization for Foreign Currency Operations and the Foreign Currency Directive, the Federal Reserve Bank of New York, through the Manager, System Open Market Account ("Manager"), shall be guided by the following procedural understandings with respect to consultations and clearances with the Committee, the Foreign Currency Subcommittee, and the Chairman of the Committee, unless otherwise directed by the Committee. All operations undertaken pursuant to such clearances shall be reported promptly to the Committee. 1. The Manager shall clear with the Subcommittee (or with the Chairman, if the Chairman believes that consultation with the Subcommittee is not feasible in the time available): A. Any operation that would result in a change in the System's overall open position in foreign currencies exceeding $300 million on any day or $600 million since the most recent regular meeting of the Committee. B. Any operation that would result in a change on any day in the System's net position in a single foreign currency exceeding $150 million, or $300 million when the operation is associated with repayment of swap drawings. C. Any operation that might generate a substantial volume of trading in a particular currency by the System, even though the change in the System's net position in that currency might be less than the limits specified in 1.B. D. Any swap drawing proposed by a foreign bank not exceeding the larger of (i) $200 million or (ii) 15 percent of the size of the swap arrangement. 2. The Manager shall clear with the Committee (or with the Subcommittee, if the Subcommittee believes that consultation with the full Committee is not feasible in the time available, or with the Chairman, if the Chairman believes that consultation with the Subcommittee is not feasible in the time available): A. Any operation that would result in a change in the System's overall open position in foreign currencies exceeding $1.5 billion since the most recent regular meeting of the Committee. B. Any swap drawing proposed by a foreign bank exceeding the larger of (i) $200 million or (ii) 15 percent of the size of the swap arrangement. 3. The Manager shall also consult with the Subcommittee or the Chairman about proposed swap drawings by the System and about any operations that are not of a routine character. By unanimous vote, the Committee reaffirmed its Program for Security of FOMC Information. Statement on Longer-Run Goals and Monetary Policy Strategy Following the Committee's disposition of organizational matters, participants considered a revised draft of a statement of principles regarding the FOMC's longer-run goals and monetary policy strategy. The revisions reflected discussion of an earlier draft during the Committee's December meeting as well as comments received over the intermeeting period. The Chairman noted that the proposed statement did not represent a change in the Committee's policy approach. Instead, the statement was intended to help enhance the transparency, accountability, and effectiveness of monetary policy. In presenting the draft statement on behalf of the subcommittee on communications, Governor Yellen pointed out several key elements. First, the statement expresses the FOMC's commitment to explain its policy decisions as clearly as possible. Second, the statement specifies a numerical inflation goal in a context that firmly underscores the Federal Reserve's commitment to fostering both parts of its dual mandate. Third, the statement is intended to serve as an overarching set of principles that would be reaffirmed during the Committee's organizational meeting each year, and the bar for amending the statement would be high. All participants but one supported adopting the revised statement of principles regarding longer-run goals and monetary policy strategy, which is reproduced below. "Following careful deliberations at its recent meetings, the Federal Open Market Committee (FOMC) has reached broad agreement on the following principles regarding its longer-run goals and monetary policy strategy. The Committee intends to reaffirm these principles and to make adjustments as appropriate at its annual organizational meeting each January. The FOMC is firmly committed to fulfilling its statutory mandate from the Congress of promoting maximum employment, stable prices, and moderate long-term interest rates. The Committee seeks to explain its monetary policy decisions to the public as clearly as possible. Such clarity facilitates well-informed decisionmaking by households and businesses, reduces economic and financial uncertainty, increases the effectiveness of monetary policy, and enhances transparency and accountability, which are essential in a democratic society. Inflation, employment, and long-term interest rates fluctuate over time in response to economic and financial disturbances. Moreover, monetary policy actions tend to influence economic activity and prices with a lag. Therefore, the Committee's policy decisions reflect its longer-run goals, its medium-term outlook, and its assessments of the balance of risks, including risks to the financial system that could impede the attainment of the Committee's goals. The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate. Communicating this inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the Committee's ability to promote maximum employment in the face of significant economic disturbances. The maximum level of employment is largely determined by nonmonetary factors that affect the structure and dynamics of the labor market. These factors may change over time and may not be directly measurable. Consequently, it would not be appropriate to specify a fixed goal for employment; rather, the Committee's policy decisions must be informed by assessments of the maximum level of employment, recognizing that such assessments are necessarily uncertain and subject to revision. The Committee considers a wide range of indicators in making these assessments. Information about Committee participants' estimates of the longer-run normal rates of output growth and unemployment is published four times per year in the FOMC's Summary of Economic Projections. For example, in the most recent projections, FOMC participants' estimates of the longer-run normal rate of unemployment had a central tendency of 5.2 percent to 6.0 percent, roughly unchanged from last January but substantially higher than the corresponding interval several years earlier. In setting monetary policy, the Committee seeks to mitigate deviations of inflation from its longer-run goal and deviations of employment from the Committee's assessments of its maximum level. These objectives are generally complementary. However, under circumstances in which the Committee judges that the objectives are not complementary, it follows a balanced approach in promoting them, taking into account the magnitude of the deviations and the potentially different time horizons over which employment and inflation are projected to return to levels judged consistent with its mandate." All FOMC members voted to adopt this statement except Mr. Tarullo, who abstained because he questioned the ultimate usefulness of the statement in promoting better communication of the Committee's policy strategy. Developments in Financial Markets and the Federal Reserve's Balance Sheet The Manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets during the period since the Federal Open Market Committee (FOMC) met on December 13, 2011. He also reported on System open market operations, including the ongoing reinvestment into agency-guaranteed mortgage-backed securities (MBS) of principal payments received on SOMA holdings of agency debt and agency-guaranteed MBS as well as the operations related to the maturity extension program authorized at the September 20–21 FOMC meeting. By unanimous vote, the Committee ratified the Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account over the intermeeting period. Staff Review of the Economic Situation The information reviewed at the January 24-25 meeting indicated that U.S. economic activity continued to expand moderately, while global growth appeared to be slowing. Overall conditions in the labor market improved further, although the unemployment rate remained elevated. Consumer price inflation was subdued, and measures of long-run inflation expectations remained stable. The unemployment rate declined to 8.5 percent in December; however, both long-duration unemployment and the share of workers employed part time for economic reasons were still quite high. Private nonfarm employment continued to expand moderately, while state and local government employment decreased at a slower pace than earlier in 2011. Some indicators of firms' hiring plans improved. Initial claims for unemployment insurance edged lower, on balance, since the middle of December but remained at a level consistent with only modest employment growth. Industrial production expanded in November and December, on net, and the rate of manufacturing capacity utilization moved up. Motor vehicle assemblies were scheduled to increase, on balance, in the first quarter of 2012, and broader indicators of manufacturing activity, such as the diffusion indexes of new orders from the national and regional manufacturing surveys, were at levels that suggested moderate growth in production in the near term. Real personal consumption expenditures continued to rise moderately in November, boosted by spending for motor vehicles and other durables, although households' real disposable income edged down. In December, however, nominal retail sales excluding purchases at motor vehicle and parts outlets declined, and sales of motor vehicles also dropped slightly. Consumer sentiment improved further in early January but was still at a low level. Activity in the housing market improved a bit in recent months but continued to be held down by the large overhang of foreclosed and distressed properties, uncertainty about future home prices, and tight underwriting standards for mortgage loans. Starts and permits for new single-family homes rose in November and December but remained only a little above the depressed levels seen earlier in 2011. Sales of new and existing homes also firmed somewhat in recent months, but home prices continued to trend lower. Real business expenditures on equipment and software appeared to have decelerated in the fourth quarter. Nominal orders and shipments of nondefense capital goods excluding aircraft declined in November for a second month. Forward-looking indicators of firms' equipment spending were mixed: Some survey measures of business conditions and capital spending plans improved, but corporate bond spreads continued to be elevated and analysts' earnings expectations for producers of capital goods remained muted. Nominal business spending for nonresidential construction was unchanged in November and continued to be held back by high vacancy rates and tight credit conditions for construction loans. Inventories in most industries looked to be well aligned with sales, though motor vehicle stocks remained lean. Monthly data for federal government spending pointed to a significant decline in real defense purchases in the fourth quarter. Real state and local government purchases seemed to be decreasing at a slower rate than during earlier quarters, as the pace of reductions in payrolls eased and construction spending leveled off in recent months. The U.S. international trade deficit widened in November as exports fell and imports rose. Exports declined in most major categories, with the exception of consumer goods. Exports of industrial supplies and materials were especially weak, though the weakness was concentrated in a few particularly volatile categories and reflected, in part, declines in prices. The rise in imports largely reflected higher imports of petroleum products and automotive products, which more than offset decreases in most other broad categories of imports. Overall U.S. consumer prices as measured by the price index for personal consumption expenditures were unchanged in November; as measured by the consumer price index, they were flat in December as well. Consumer energy prices decreased in recent months, while increases in consumer food prices slowed. Consumer prices excluding food and energy rose modestly in the past two months. Near-term inflation expectations from the Thomson Reuters/University of Michigan Surveys of Consumers were essentially unchanged in early January, and longer-term inflation expectations remained stable. Available measures of labor compensation indicated that wage gains continued to be modest. Average hourly earnings for all employees posted a moderate gain in December, and their rate of increase from 12 months earlier remained slow. Recent indicators of foreign economic activity pointed to a substantial deceleration in the fourth quarter of 2011. In the euro area, retail sales and industrial production were below their third-quarter averages in both October and November. Economic activity in much of Asia was disrupted by the effects of severe flooding in Thailand, which affected supply chains in the region. Twelve-month inflation rates receded in several advanced and emerging market economies, and most central banks maintained policy rates or eased further while continuing to provide significant liquidity support. Staff Review of the Financial Situation Developments in Europe continued to be a central focus for investors over the intermeeting period as concerns persisted about the prospects for a durable solution to the European fiscal and financial difficulties. Nevertheless, market sentiment toward Europe appeared to brighten a bit, and U.S. economic data releases were somewhat better than investors expected, leading to some improvement in conditions in financial markets. On balance over the period, the expected path for the federal funds rate implied by money market futures quotes was essentially unchanged. Yields on nominal Treasury securities rose slightly at intermediate and longer maturities. Indicators of inflation compensation derived from nominal and inflation-protected Treasury securities edged up. U.S. financial institutions reportedly retained ready access to short-term funding markets; there were no significant dislocations in those markets over year-end. Dollar funding pressures for European banks eased slightly. While spreads of the London interbank offered rate (Libor) over overnight index swap (OIS) rates of the same maturity remained elevated, rates for unsecured overnight commercial paper (CP) issued by some entities with European parents declined substantially following the lowering of charges on the central bank liquidity swap lines with the Federal Reserve, the implementation by the European Central Bank (ECB) of its first three-year longer-term refinancing operation (LTRO), and the passage of year-end. In secured funding markets, spreads of overnight asset-backed CP rates over overnight unsecured CP rates also declined, and the general collateral repurchase agreement, or repo, market continued to function normally. Indicators of financial stress eased somewhat over the intermeeting period, although they generally continued to be elevated. Market-based measures of possible spillovers from troubles at particular financial firms to the broader financial system were below their levels in the fall but remained above their levels prior to the financial crisis. Initial fourth-quarter earnings reports for large bank holding companies were mixed relative to market expectations, with poor capital market revenues weighing on the profits of institutions with significant trading operations. Although credit default swap (CDS) spreads of most large domestic bank holding companies remained elevated, they moved lower over the intermeeting period, and some institutions took advantage of easing credit conditions by issuing significant quantities of new long-term debt. Equity prices of most large domestic financial institutions outperformed the broader market, on net, over the intermeeting period. Nonetheless, the ratio of the market value of bank equity to its book value remained low for some large financial firms. Responses to the December Senior Credit Officer Opinion Survey on Dealer Financing Terms indicate that, since August, securities dealers have devoted increased time and attention to the management of concentrated credit exposures to other financial intermediaries, pointing to increased concern over counterparty risk. Broad equity price indexes increased more than 6 percent, on net, over the intermeeting period, and option-implied equity volatility declined notably. Yields on investment-grade corporate bonds declined a bit relative to those on comparable-maturity Treasury securities, while spreads of speculative-grade corporate bond yields over yields on Treasury securities decreased noticeably. Indicators of the credit quality of nonfinancial corporations continued to be solid. Conditions in the secondary market for leveraged loans were stable, with median bid prices about unchanged. Financing conditions for large nonfinancial businesses generally remained favorable. Bond issuance by investment-grade nonfinancial corporations was robust, though below its elevated November pace, while issuance by lower-rated firms slowed, likely owing in part to seasonal factors. Issuance of leveraged loans was relatively modest in the fourth quarter compared with its rapid pace earlier in the year. Share repurchases and cash-financed mergers by nonfinancial firms maintained their recent strength in the third quarter, leaving net equity issuance deeply negative. Financing conditions for commercial real estate (CRE) remained strained, and issuance of commercial mortgage-backed securities was very light in the fourth quarter. Responses to the January Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS) indicated that bank CRE lending standards continued to be extraordinarily tight, but some banks reported having reduced the spreads of loan rates over their cost of funds (compared with a year ago) for the first time since 2007. Delinquency rates on commercial mortgages remained elevated, and CRE price indexes continued to fluctuate around levels substantially lower than their 2007 peaks. Conditions in residential mortgage markets remained extremely tight. Although mortgage interest rates and yields on current-coupon agency MBS edged down to near their historical lows, mortgage refinancing activity continued to be subdued amid tight underwriting standards and low levels of home equity. Mortgage delinquency rates, while improving gradually, remained elevated relative to pre-crisis norms, and house prices continued to move lower. The price of subprime residential mortgage-backed securities (RMBS), as measured by the ABX index, rose over the intermeeting period, consistent with similar changes for other higher-risk fixed-income securities. RMBS prices were supported by reports of the sale of a significant portion of the RMBS held in the Maiden Lane II portfolio. On the whole, conditions in consumer credit markets showed signs of improvement. Consumer credit increased in November, while delinquency rates on credit card loans in securitized pools held steady in November at historically low levels. Data on credit card solicitations and from responses to the January SLOOS suggested that lending standards on consumer loans continued to ease modestly. Financing conditions for state and local governments were mixed. Gross long-term issuance of municipal bonds remained robust in December, with continued strength in new issuance for capital projects. CDS spreads for states inched down further over the intermeeting period, and yields on long-term general obligation municipal bonds fell notably. However, downgrades of municipal bonds continued to substantially outpace upgrades in the third quarter. In the fourth quarter, bank credit continued to increase as banks accumulated agency MBS and growth of total loans picked up. Core loans--the sum of commercial and industrial (C&I) loans, real estate loans, and consumer loans--expanded modestly. Growth of C&I loans at domestic banks was robust but was partly offset by weakness at U.S. branches and agencies of European banks. Noncore loans rose sharply, on net, reflecting in part a surge in such loans at the U.S. branches and agencies of European institutions. Responses to the January SLOOS indicated that, in the aggregate, loan demand strengthened slightly and lending standards eased a bit further in the fourth quarter. M2 increased at an annual rate of 5 1/4 percent in December, likely reflecting continued demand for safe and liquid assets given investor concerns over developments in Europe. In addition, demand deposits rose rapidly around year-end, reportedly because lenders in short-term funding markets chose to leave substantial balances with banks over the turn of the year. The monetary base increased in December, largely reflecting growth in currency. Reserve balances were roughly unchanged over the intermeeting period. International financial markets seemed somewhat calmer over the intermeeting period than they had been in previous months, and the funding conditions faced by most European financial institutions and sovereigns eased somewhat in the wake of the ECB's first three-year LTRO. Short-term euro interest rates moved lower as euro-area institutions drew a substantial amount of three-year funds from the ECB, and dollar funding costs for European banks also appeared to decline. Spreads of yields on Italian and Spanish government debt over those on German bunds narrowed over the intermeeting period, with spreads on shorter-term debt falling particularly noticeably. The apparent improvement in market sentiment was not diminished by news late in the period that Standard & Poor's lowered its long-term sovereign bond ratings of nine euro-area countries and the European Financial Stability Facility or by news that negotiations over the terms of a voluntary private-sector debt exchange for Greece had not yet reached a conclusion. The staff's broad index of the foreign exchange value of the dollar declined slightly over the intermeeting period. While the dollar fell against most other currencies, it appreciated against the euro. Foreign stock markets generally ended the period higher, with headline equity indexes in Europe and the emerging market economies up substantially, although emerging market equity and bond funds continued to experience outflows on net during the period. Staff Economic Outlook In the economic forecast prepared for the January FOMC meeting, the staff's projection for the growth in real gross domestic product (GDP) in the near term was revised down a bit. The revision reflected the apparent decline in federal defense purchases and the somewhat shallower trajectory for consumer spending in recent months; the recent data on the labor market, production, and other spending categories were, on balance, roughly in line with the staff's expectations at the time of the previous forecast. The medium-term projection for real GDP growth in the January forecast was little changed from the one presented in December. Although the developments in Europe were expected to continue to weigh on the U.S. economy during the first half of this year, the staff still projected that real GDP growth would accelerate gradually in 2012 and 2013, supported by accommodative monetary policy, further improvements in credit availability, and rising consumer and business sentiment. The increase in real GDP was expected to be sufficient to reduce the slack in product and labor markets only slowly over the projection period, and the unemployment rate was anticipated to still be high at the end of 2013. The staff's forecast for inflation was essentially unchanged from the projection prepared for the December FOMC meeting. With stable long-run inflation expectations and substantial slack in labor and product markets anticipated to persist over the forecast period, the staff continued to project that inflation would remain subdued in 2012 and 2013. Participants' Views on Current Conditions and the Economic Outlook In conjunction with this FOMC meeting, all participants--the five members of the Board of Governors and the presidents of the 12 Federal Reserve Banks--provided projections of output growth, the unemployment rate, and inflation for each year from 2011 through 2014 and over the longer run. Longer-run projections represent each participant's assessment of the rate to which each variable would be expected to converge, over time, under appropriate monetary policy and in the absence of further shocks to the economy. Starting with this meeting, participants also provided assessments of the path for the target federal funds rate that they view as appropriate and compatible with their individual economic projections. Participants' economic projections and policy assessments are described in more detail in the Summary of Economic Projections, which is attached as an addendum to these minutes. In their discussion of the economic situation and outlook, meeting participants agreed that the information received since the Committee met in December suggested that the economy had been expanding moderately, notwithstanding some slowing in growth abroad. In general, labor market indicators pointed to some further improvement in labor market conditions, but progress was gradual and the unemployment rate remained elevated. Household spending had continued to advance at a moderate pace despite still-sluggish growth in real disposable income, but growth in business fixed investment had slowed. The housing sector remained depressed, with very low levels of activity; there were, however, signs of improvement in some local housing markets. Many participants observed that some indicators bearing on the economy's recent performance had shown greater-than-expected improvement, but a number also noted less favorable data; one noted that growth in final sales appeared to have slowed in the fourth quarter of last year even as output growth picked up. Inflation had been subdued in recent months, there was little evidence of wage or cost pressures, and longer-term inflation expectations had remained stable. With respect to the economic outlook, participants generally anticipated that economic growth over coming quarters would be modest and, consequently, expected that the unemployment rate would decline only gradually. A number of factors were seen as likely to restrain the pace of economic expansion, including the slowdown in economic activity abroad, fiscal tightening in the United States, the weak housing market, further household deleveraging, high levels of uncertainty among households and businesses, and the possibility of increased volatility in financial markets until the fiscal and banking issues in the euro area are more fully addressed. Participants continued to expect these headwinds to ease over time and so anticipated that the recovery would gradually gain strength. However, participants agreed that strains in global financial markets continued to pose significant downside risks to the economic outlook. With unemployment expected to remain elevated, and with longer-term inflation expectations stable, almost all participants expected inflation to remain subdued in coming quarters--that is, to run at or below the 2 percent level that the Committee judges most consistent with its statutory mandate over the longer run. In discussing the household sector, meeting participants noted that consumer spending had grown moderately in recent months. Consumer sentiment had improved since last summer, though its level was still quite low. Business contacts in the retail sector reported generally satisfactory holiday sales, but high-end retailers saw strong gains while lower-end retailers saw mixed results. Contacts also reported widespread discounting. Major express delivery companies indicated very high volumes at year-end and into January. Several participants observed that consumer spending had outpaced growth in personal disposable income last year, and a few noted that households remained pessimistic about their income prospects and uncertain about the economic outlook. These observations suggested that growth of consumer spending might slow. However, a few other participants pointed to increasing job gains in recent months as contributing to an improving trend in real incomes and thus supporting continued moderate growth in consumer spending. Reports from business contacts indicated that activity in the manufacturing, energy, and agricultural sectors continued to advance in recent months. Businesses generally reported that they remained cautious regarding capital spending and hiring; some contacts cited uncertainty about the economic outlook and about fiscal and regulatory policy. Nonetheless, business contacts had become somewhat more optimistic, with more contacts reporting plans to expand capacity and payrolls. Some companies indicated that they planned to relocate some production from abroad to the United States. A few participants noted that national and District surveys of firms' capital spending plans suggested that the recent slowing in business fixed investment was partly temporary. The combination of high energy prices and availability of new drilling technologies was promoting strong growth in investment outlays in the energy sector. Participants generally saw the housing sector as still depressed. The level of activity remained quite weak, house prices were continuing to decline in most areas, and the overhang of foreclosed and distressed properties was still substantial. Nonetheless, there were some small signs of improvement. The inventory of unsold homes had declined, though in part because the foreclosure process had slowed, and issuance of permits for new single-family homes had risen from its lows. One participant again noted reports from some homebuilders suggesting that land prices were edging up and that financing was available from nonbank sources. Another participant cited reports from business contacts indicating that credit standards in mortgage lending were becoming somewhat less stringent. Yet another noted that recent changes to the Home Affordable Refinance Program, which were intended to streamline the refinancing of performing high-loan-to-value mortgages, were showing some success. Participants generally expected that growth of U.S. exports was likely to be held back in the coming year by slower global economic growth. In particular, fiscal austerity programs in Europe and stresses in the European banking system seemed likely to restrain economic growth there, perhaps with some spillover to growth in Asia. One participant noted that shipping rates had declined of late, suggesting that a slowdown in international trade might be under way. Participants agreed that recent indicators showed some further gradual improvement in overall labor market conditions: Payroll employment had increased somewhat more rapidly in recent months, new claims for unemployment insurance had trended lower, and the unemployment rate had declined. Some business contacts indicated that they planned to do more hiring this year than last. However, unemployment--including longer-term unemployment--remained elevated, and the numbers of discouraged workers and people working part time because they could not find full-time work were also still quite high. Participants expressed a range of views on the current extent of slack in the labor market. Very high long-duration unemployment might indicate a mismatch between unemployed workers' skills and employers' needs, suggesting that a substantial part of the increase in unemployment since the beginning of the recession reflected factors other than a shortfall in aggregate demand. In contrast, the quite modest increases in labor compensation of late, and the large number of workers reporting that they are working part time because their employers have cut their hours, suggested that underutilization of labor was still substantial. A few participants noted that the recent decline in the unemployment rate reflected declining labor force participation in large part, and judged that the decline in the participation rate was likely to be reversed, at least to some extent, as the recovery continues and labor demand picks up. Meeting participants observed that financial conditions improved and financial market stresses eased somewhat during the intermeeting period: Equity prices rose, volatility declined, and bank lending conditions appeared to improve. Participants noted that the ECB's three-year refinancing operation had apparently contributed to improved conditions in European sovereign debt markets. Nonetheless, participants expected that global financial markets would remain focused on the evolving situation in Europe and anticipated that continued policy efforts would be necessary in Europe to fully address the area's fiscal and financial problems. U.S. banks reported increases in commercial lending as some European lenders pulled back, and some banking contacts indicated that creditworthy companies' demand for credit had increased. A number of participants noted further improvement in the availability of loans to businesses, with a couple of them indicating that small business contacts had reported increased availability of bank credit. However, a few other participants commented that small businesses in their Districts continued to face difficulty in obtaining bank loans. Participants observed that longer-run inflation expectations were still well anchored and also noted that inflation had been subdued in recent months, partly reflecting a decline in commodity prices and an easing of supply chain disruptions since mid-2011. In addition, labor compensation had risen only slowly and productivity continued to increase. One participant reported that a survey of business inflation expectations indicated firms were anticipating increases in unit costs on the order of 1 3/4 percent this year, just a bit higher than last year. Looking farther ahead, participants generally judged that the modest expansion in economic activity that they were projecting would be consistent with a gradual reduction in the current wide margins of slack in labor and product markets and with subdued inflation going forward. Some remained concerned that, with the persistence of considerable resource slack, inflation might continue to drift down and run below mandate-consistent levels for some time. However, a couple of participants were concerned that inflation could rise as the recovery continued and argued that providing additional monetary accommodation, or even maintaining the current highly accommodative stance of monetary policy over the medium run, would erode the stability of inflation expectations and risk higher inflation. Committee participants discussed possible changes to the forward guidance that has been included in the Committee's recent post-meeting statements. Many participants thought it important to explore means for better communicating policymakers' thinking about future monetary policy and its relationship to evolving economic conditions. A couple of participants expressed concern that some press reports had misinterpreted the Committee's use of a date in its forward guidance as a commitment about its future policy decisions. Several participants thought it would be helpful to provide more information about the economic conditions that would be likely to warrant maintaining the current target range for the federal funds rate, perhaps by providing numerical thresholds for the unemployment and inflation rates. Different opinions were expressed regarding the appropriate values of such thresholds, reflecting different assessments of the path for the federal funds rate that would likely be appropriate to foster the Committee's longer-run goals. However, some participants worried that such thresholds would not accurately or effectively convey the Committee's forward-looking approach to monetary policy and thus would pose difficult communications issues, or that movements in the unemployment rate, by themselves, would be an unreliable measure of progress toward maximum employment. Several participants proposed either dropping or greatly simplifying the forward guidance in the Committee's statement, arguing that information about participants' assessments of the appropriate future level of the federal funds rate, which would henceforth be contained in the Summary of Economic Projections (SEP), made it unnecessary to include forward guidance in the post-meeting statement. However, several other participants emphasized that the information regarding the federal funds rate in the SEP could not substitute for a formal decision of the members of the FOMC. Participants agreed to continue exploring approaches for providing the public with greater clarity about the linkages between the economic outlook and the Committee's monetary policy decisions. Committee Policy Action Members viewed the information on U.S. economic activity received over the intermeeting period as suggesting that the economy had been expanding moderately and generally agreed that the economic outlook had not changed greatly since they met in December. While overall labor market conditions had improved somewhat further and unemployment had declined in recent months, almost all members viewed the unemployment rate as still elevated relative to levels that they saw as consistent with the Committee's mandate over the longer run. Available data indicated some slowing in the pace of economic growth in Europe and in some emerging market economies, pointing to reduced growth of U.S. exports going forward. With the economy facing continuing headwinds from the recent financial crisis and with growth slowing in a number of U.S. export markets, members generally expected a modest pace of economic growth over coming quarters, with the unemployment rate declining only gradually. Strains in global financial markets continued to pose significant downside risks to economic activity. Inflation had been subdued in recent months, and longer-term inflation expectations remained stable. Members generally anticipated that inflation over coming quarters would run at or below the 2 percent level that the Committee judges most consistent with its mandate. In their discussion of monetary policy for the period ahead, members agreed that it would be appropriate to maintain the existing highly accommodative stance of monetary policy. In particular, they agreed to keep the target range for the federal funds rate at 0 to 1/4 percent, to continue the program of extending the average maturity of the Federal Reserve's holdings of securities as announced in September, and to retain the existing policies regarding the reinvestment of principal payments from Federal Reserve holdings of securities. With respect to the statement to be released following the meeting, members agreed that only relatively small modifications to the first two paragraphs were needed to reflect the incoming information and the modest changes to the economic outlook implied by the recent data. In light of the economic outlook, almost all members agreed to indicate that the Committee expects to maintain a highly accommodative stance for monetary policy and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014, longer than had been indicated in recent FOMC statements. In particular, several members said they anticipated that unemployment would still be well above their estimates of its longer-term normal rate, and inflation would be at or below the Committee's longer-run objective, in late 2014. It was noted that extending the horizon of the Committee's forward guidance would help provide more accommodative financial conditions by shifting downward investors' expectations regarding the future path of the target federal funds rate. Some members underscored the conditional nature of the Committee's forward guidance and noted that it would be subject to revision in response to significant changes in the economic outlook. The Committee also stated that it is prepared to adjust the size and composition of its securities holdings as appropriate to promote a stronger economic recovery in a context of price stability. A few members observed that, in their judgment, current and prospective economic conditions--including elevated unemployment and inflation at or below the Committee's objective--could warrant the initiation of additional securities purchases before long. Other members indicated that such policy action could become necessary if the economy lost momentum or if inflation seemed likely to remain below its mandate-consistent rate of 2 percent over the medium run. In contrast, one member judged that maintaining the current degree of policy accommodation beyond the near term would likely be inappropriate; that member anticipated that a preemptive tightening of monetary policy would be necessary before the end of 2014 to keep inflation close to 2 percent. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to continue the maturity extension program it began in September to purchase, by the end of June 2012, Treasury securities with remaining maturities of approximately 6 years to 30 years with a total face value of $400 billion, and to sell Treasury securities with remaining maturities of 3 years or less with a total face value of $400 billion. The Committee also directs the Desk to maintain its existing policies of rolling over maturing Treasury securities into new issues and of reinvesting principal payments on all agency debt and agency mortgage-backed securities in the System Open Market Account in agency mortgage-backed securities in order to maintain the total face value of domestic securities at approximately $2.6 trillion. The Committee directs the Desk to engage in dollar roll transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability." The vote encompassed approval of the statement below to be released at 12:30 p.m.: "Information received since the Federal Open Market Committee met in December suggests that the economy has been expanding moderately, notwithstanding some slowing in global growth. While indicators point to some further improvement in overall labor market conditions, the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment has slowed, and the housing sector remains depressed. Inflation has been subdued in recent months, and longer-term inflation expectations have remained stable. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects economic growth over coming quarters to be modest and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that over coming quarters, inflation will run at levels at or below those consistent with the Committee's dual mandate. To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014. The Committee also decided to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability." Voting for this action: Ben Bernanke, William C. Dudley, Elizabeth Duke, Dennis P. Lockhart, Sandra Pianalto, Sarah Bloom Raskin, Daniel K. Tarullo, John C. Williams, and Janet L. Yellen. Voting against this action: Jeffrey M. Lacker. Mr. Lacker dissented because he preferred to omit the description of the time period over which economic conditions were likely to warrant exceptionally low levels of the federal funds rate. He expected that a preemptive tightening of monetary policy would be necessary to prevent an increase in inflation projections or inflation expectations prior to the end of 2014. More broadly, given the inclusion of FOMC participants' projections for the federal funds rate target in the Summary of Economic Projections, he saw no need to provide additional forward guidance in the Committee statement. It was agreed that the next meeting of the Committee would be held on Tuesday, March 13, 2012. The meeting adjourned at 11:30 a.m. on January 25, 2012. Notation Vote By notation vote completed on December 30, 2011, the Committee unanimously approved the minutes of the FOMC meeting held on December 13, 2011.   _____________________________ William B. English Secretary   1. Attended Tuesday's session only. Return to text 2. Attended the discussion of the role of financial conditions in economic recovery. Return to text

2012-01-03

Minute

A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held in the offices of the Board of Governors in Washington, D.C., on Tuesday, December 13, 2011, at 8:30 a.m. PRESENT: Ben Bernanke, Chairman William C. Dudley, Vice Chairman Elizabeth Duke Charles L. Evans Richard W. Fisher Narayana Kocherlakota Charles I. Plosser Sarah Bloom Raskin Daniel K. Tarullo Janet L. Yellen Christine Cumming, Jeffrey M. Lacker, Dennis P. Lockhart, Sandra Pianalto, and John C. Williams, Alternate Members of the Federal Open Market Committee James Bullard, Esther L. George, and Eric Rosengren, Presidents of the Federal Reserve Banks of St. Louis, Kansas City, and Boston, respectively William B. English, Secretary and Economist Deborah J. Danker, Deputy Secretary Matthew M. Luecke, Assistant Secretary David W. Skidmore, Assistant Secretary Michelle A. Smith, Assistant Secretary Scott G. Alvarez, General Counsel Thomas C. Baxter, Deputy General Counsel Steven B. Kamin, Economist David W. Wilcox, Economist Thomas A. Connors, Loretta J. Mester, Simon Potter, David Reifschneider, Harvey Rosenblum, and Lawrence Slifman, Associate Economists Brian Sack, Manager, System Open Market Account Jennifer J. Johnson, Secretary of the Board, Office of the Secretary, Board of Governors Robert deV. Frierson, Deputy Secretary, Office of the Secretary, Board of Governors Maryann F. Hunter, Deputy Director, Division of Banking Supervision and Regulation, Board of Governors; William Wascher, Deputy Director, Division of Research and Statistics, Board of Governors Andreas Lehnert, Deputy Director, Office of Financial Stability Policy and Research, Board of Governors Andrew T. Levin, Special Advisor to the Board, Office of Board Members, Board of Governors Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors Seth B. Carpenter, Senior Associate Director, Division of Monetary Affairs, Board of Governors; Michael P. Leahy, Senior Associate Director, Division of International Finance, Board of Governors Ellen E. Meade, Stephen A. Meyer, and Joyce K. Zickler, Senior Advisers, Division of Monetary Affairs, Board of Governors Eric M. Engen, Michael T. Kiley, and Michael G. Palumbo, Associate Directors, Division of Research and Statistics, Board of Governors David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors Penelope A. Beattie, Assistant to the Secretary, Office of the Secretary, Board of Governors Gordon Werkema, First Vice President, Federal Reserve Bank of Chicago Jeff Fuhrer and Mark S. Sniderman, Executive Vice Presidents, Federal Reserve Banks of Boston and Cleveland, respectively David Altig, Alan D. Barkema, Richard P. Dzina, Spencer Krane, and Christopher J. Waller, Senior Vice Presidents, Federal Reserve Banks of Atlanta, Kansas City, New York, Chicago, and St. Louis, respectively Mary C. Daly, Group Vice President, Federal Reserve Bank of San Francisco Alexander L. Wolman, Senior Economist and Research Advisor, Federal Reserve Bank of Richmond Samuel Schulhofer-Wohl, Senior Economist, Federal Reserve Bank of Minneapolis By unanimous vote, the Committee selected Steven B. Kamin to serve as Economist until the selection of a successor at the first regularly scheduled meeting of the Committee in 2012. Developments in Financial Markets and the Federal Reserve's Balance Sheet The Manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets during the period since the Federal Open Market Committee (FOMC) met on November 1–2, 2011. He also reported on System open market operations, including the ongoing reinvestment into agency-guaranteed mortgage-backed securities (MBS) of principal payments received on SOMA holdings of agency debt and agency-guaranteed MBS as well as the operations related to the maturity extension program authorized at the September 20–21 FOMC meeting. By unanimous vote, the Committee ratified the Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account over the intermeeting period. Staff Review of the Economic Situation The information reviewed at the December 13 meeting indicated that U.S. economic activity expanded moderately despite some apparent slowing in the growth of foreign economies and strains in global financial markets. Conditions in the labor market seemed to have improved somewhat, while overall consumer price inflation continued to be more modest than earlier in the year and measures of long-run inflation expectations remained stable. The unemployment rate dropped to 8.6 percent in November, and private nonfarm employment continued to increase moderately during the past two months. Nevertheless, employment at state and local governments declined further, and both long-duration unemployment and the share of workers employed part time for economic reasons remained elevated. Initial claims for unemployment insurance moved down, on net, since early November but were still at a level consistent with only modest employment gains, and indicators of job openings and businesses' hiring plans were little changed. Industrial production rose in October, reflecting in part a rebound in motor vehicle production from the effects of supply chain disruptions earlier in the year. Factory output outside of the motor vehicle sector also continued to rise, and the rate of manufacturing capacity utilization moved up. However, motor vehicle assemblies were scheduled to only edge higher, on balance, in the coming months, and broader indicators of manufacturing activity, such as the diffusion indexes of new orders from the national and regional manufacturing surveys, were at levels that suggested only modest increases in production in the near term. Revised estimates indicated that households' real disposable income declined in the second and third quarters, and the net wealth of households decreased in the third quarter. Nonetheless, overall real personal consumption expenditures (PCE) rose modestly in October following significant gains in the previous month, as spending for consumer goods continued to increase at a strong pace while outlays for consumer services were roughly flat. In November, nominal retail sales, excluding purchases at motor vehicle and parts outlets, expanded further, and sales of light motor vehicles stepped up. But consumer sentiment was still at a subdued level in early December despite some improvement in recent months. Activity in the housing market continued to be depressed by the substantial inventory of foreclosed and distressed properties and by weak demand that reflected tight credit conditions for mortgage loans and uncertainty about future home prices. Starts and permits for new single-family homes in October stayed around the low levels that prevailed since the middle of last year. Sales of new and existing homes remained slow in recent months, and home prices moved down further. Real business spending on equipment and software seemed to be decelerating. Nominal orders and shipments of nondefense capital goods excluding aircraft edged down in October, and the slowing accumulation of unfilled orders suggested that increases in outlays for business equipment would be muted in subsequent months. Also, survey measures of business conditions and sentiment remained at relatively downbeat levels in November. Real business spending for nonresidential construction moved up in October but was still at a low level, reflecting high vacancy rates and restricted credit conditions for construction loans. Inventories in most industries looked to be reasonably well aligned with sales, although motor vehicle stocks continued to be lean. In the government sector, real federal defense purchases appeared to have stepped down in October and November from their level in the third quarter. At the state and local level, real purchases seemed to be decreasing at a slower pace in recent months than earlier in the year. The U.S. international trade deficit narrowed in October, as imports decreased more than exports. Declines in imports of petroleum products (reflecting lower prices and lesser volumes), non-oil industrial supplies, and automotive products more than offset increases in capital goods, consumer goods, and food. Reductions in exports of industrial supplies and consumer goods, led by a few particularly volatile components, outweighed the gains in capital goods. Inflation continued to decrease relative to earlier in the year. Indeed, the PCE price index edged down in October. Consumer prices for energy decreased, and survey data indicated that gasoline prices declined further in November. Increases in consumer food prices in October were substantially slower than the average pace in the preceding months of this year. Consumer prices excluding food and energy also continued to rise at a more modest pace in October than earlier in the year. Near-term inflation expectations from the Thomson Reuters/University of Michigan Surveys of Consumers declined in early December, and longer-term inflation expectations remained stable. Measures of labor compensation indicated that nominal wage gains continued to be subdued. Compensation per hour in the nonfarm business sector increased moderately over the year ending in the third quarter, while the 12-month change in average hourly earnings for all employees remained low in October and November. Unit labor costs edged up over the past four quarters. Foreign economic growth, especially in the euro area, appeared to weaken in recent months. Real gross domestic product (GDP) in the euro area barely edged up in the third quarter. Moreover, industrial production in the region fell sharply in September, and indicators of manufacturing activity in October and November pointed to lower output. Measures of business and consumer confidence in the euro area continued to decline in recent months. In other advanced foreign economies, real GDP in Japan rebounded in the third quarter from the effects of the earthquake in March, and real GDP recovered in Canada as oil production picked up after several months of shutdowns; however, available indicators of manufacturing activity in both of these economies pointed to declines during the fourth quarter. Among emerging market economies, real GDP in Brazil was flat in the third quarter, while exports from China slowed in recent months, although Chinese domestic demand appeared to remain strong. Staff Review of the Financial Situation The risks associated with the fiscal and financial difficulties in Europe remained the focus of attention in financial markets over the intermeeting period and contributed to heightened volatility in a wide range of asset markets. Investor concerns about developments in Europe intensified early in the period but subsequently eased a bit amid signs that European authorities were moving toward agreement on a comprehensive framework to address fiscal and financial vulnerabilities and after the Federal Reserve and five other major central banks announced enhanced currency swap arrangements, including lower charges on existing dollar liquidity swap lines. Nevertheless, investors appeared to remain cautious. Yields on nominal Treasury securities were little changed following the release of the November FOMC statement. Over the following weeks, movements in yields were reportedly driven by shifts in investors' assessments of the European situation and by U.S. economic data that were somewhat stronger than they expected. Both short-term nominal Treasury yields and the expected path of the federal funds rate implied by money market futures quotes were essentially unchanged, on balance, over the intermeeting period, while longer-dated Treasury yields ended the period slightly higher. Yields on current-coupon agency MBS also ended the period about unchanged. Indicators of inflation expectations derived from nominal and inflation-protected Treasury securities posted mixed changes, on net, over the period and remained at the low end of their recent ranges. Early in the intermeeting period, conditions in short-term wholesale funding markets appeared to deteriorate somewhat. Following the six major central banks' currency swap announcement, some measures of short-term funding costs moderated, but they remained elevated. In dollar funding markets, the spread of the three-month London interbank offered rate (Libor) over the overnight index swap (OIS) rate of the same maturity widened noticeably during the intermeeting period. Some European financial institutions reportedly faced significant pressures in unsecured dollar funding markets. By contrast, in secured funding markets, spreads on asset-backed commercial paper were relatively steady for U.S. and most European-based issuers, and rates on repurchase agreements across various types of collateral were stable. In the December 2011 Senior Credit Officer Opinion Survey on Dealer Financing Terms, dealers reported a moderate tightening of credit terms over the preceding three months on securities financing transactions and over-the-counter derivatives markets trades, particularly for financial counterparties. Dealers also noted that demand for funding all types of securities decreased over the same reference period. Credit default swap (CDS) spreads and equity prices of large U.S. banking organizations remained volatile over the intermeeting period. While the S&P 500 index ended the period slightly higher, on net, equity prices for most major U.S. banking firms were lower and their CDS spreads widened.  CDS spreads for European banks remained elevated as these institutions faced increasingly strained conditions in short-term funding markets. In the wake of the bankruptcy of MF Global, market participants also expressed renewed concerns about securities dealers that rely heavily on short-term wholesale funding markets, particularly those institutions not affiliated with commercial banking institutions. Yields on investment-grade and speculative-grade corporate bonds rose, on balance, over the period, and their spreads over yields on comparable-maturity Treasury securities were somewhat wider. The debt of nonfinancial firms increased in November, with corporate bond issuance particularly robust, as some firms reportedly were eager to issue bonds before year-end. Nonfinancial commercial paper outstanding and commercial and industrial loans continued to expand at a moderate pace. In the leveraged loan market, the extension of loans stepped up somewhat in November but remained sluggish relative to its average pace earlier in the year. Financing conditions for commercial real estate appeared to remain strained over the intermeeting period. Issuance of commercial mortgage-backed securities (CMBS) was light amid deteriorating liquidity conditions in the CMBS market. Prices of most types of commercial properties continued to be depressed, while both vacancy rates and delinquency rates for commercial properties stayed close to their recent highs. Interest rates on residential mortgages were little changed, on net, over the intermeeting period and remained at historically low levels. But low mortgage rates appeared to have only modest effects on the rate of mortgage refinancing, likely because of tight underwriting standards and low levels of home equity. Indicators of home prices and the credit quality of older mortgage loans remained weak. The rate of newly delinquent prime mortgages--the pace at which mortgages transition from "current" to delinquent--seemed to have slowed,  but overall delinquency rates on residential mortgages remained elevated. Market reaction to the announcements by Fannie Mae and Freddie Mac on November 15 regarding the expansion of the Home Affordable Refinance Program was limited. Consumer credit rose slightly in the third quarter. The aggregate volume of credit card solicitations in recent months remained at levels comparable to those before the financial crisis in 2008, though the volume sent to low-income households was still well below the levels at that time. Meanwhile, consumer credit quality improved further in recent months, with delinquency rates on credit card loans declining nearly to historical lows and delinquency rates on nonrevolving credit at commercial banks retreating to pre-crisis levels. Issuance of consumer credit asset-backed securities increased substantially in November. M2 expanded at a solid pace in November, likely reflecting increased demand for safe and liquid assets, given concerns over European financial developments. In part, offshore deposits, which are no longer excluded from the Federal Deposit Insurance Corporation assessment base, appeared to be shifting to onshore offices. In contrast, the monetary base declined in November. Although currency increased at a robust pace, reserve balances declined by more, reflecting a temporary decrease in the size of the SOMA as a result of lags in the settlement of MBS reinvestment transactions. Over most of November, yields on many euro-area sovereign bonds--including those of Italy, Spain, Belgium, and France--along with yields on debt issued by the European Financial Stability Facility, rose sharply relative to the yield on German government bonds. But these spreads subsequently narrowed in anticipation of the European Union (EU) summit meeting on December 9 and in reaction to the swap announcement by the Federal Reserve and the other central banks on November 30. Near the end of the period, sovereign spreads widened again amid market participants' apparent concerns that the actions announced at the EU summit would prove to be less effective than they previously had anticipated. Spreads of yields on most peripheral euro-area countries' debt over yields on German debt ended the period higher on net. German sovereign yields increased as well. Implied basis spreads from the foreign exchange swap market rose substantially over November, but reversed a portion of that increase immediately following the central banks' swap announcement. Against the background of higher dollar funding costs in the market and the reduction in the charge on dollar liquidity swaps, demand at the tender by the European Central Bank (ECB) of three-month dollar liquidity in December jumped to more than $50 billion from less than $500 million at the November auction. Euro funding pressures also moved higher over the period, with euro Libor--OIS spreads continuing to rise. In addition, maturities for repurchase agreements involving sovereign bonds of euro-area countries other than Germany reportedly shortened. Several European banks announced large declines in third-quarter profits, in part reflecting write-downs of their holdings of Greek sovereign debt. Equity prices in both advanced and emerging market economies fluctuated widely, with advanced country equities little changed, on net, and emerging market equities ending the period lower. The foreign exchange value of the dollar appreciated, on balance, over the intermeeting period. With inflationary pressures waning and the downside risks to the global economic outlook increasing, some central banks eased policy. China's central bank cut its reserve requirements by 50 basis points, and the central bank of Brazil lowered its policy rate by the same amount. The ECB reduced its minimum bid rate by 25 basis points at both its November and December meetings, relaxed its collateral and reserve requirements, and stated that it would begin to offer three-year funds at fixed rates. As a precautionary measure, the Bank of England announced a new liquidity facility that will auction term sterling funds against a wide range of collateral. Staff Economic Outlook In the economic forecast prepared for the December FOMC meeting, the staff's projection for the increase in real GDP in the near term was little changed, as the recent data on spending, production, and the labor market were, on balance, in line with the staff's expectations at the time of the previous forecast. However, the medium-term projection for real GDP growth in the December forecast was lower than the one presented in November, primarily reflecting revisions to the staff's view regarding developments in Europe and their implications for the U.S. economy. Nonetheless, the staff continued to project that the pace of economic activity would pick up gradually in 2012 and 2013, supported by accommodative monetary policy, further increases in credit availability, and improvements in consumer and business sentiment. Over the forecast period, the gains in real GDP were anticipated to be sufficient to reduce the slack in product and labor markets only slowly, and the unemployment rate was expected to remain elevated at the end of 2013. The staff's projection for inflation was little changed from the forecast prepared for the November FOMC meeting. The upward pressure on consumer prices from the increases in commodity and import prices earlier in the year was expected to continue to subside in the current quarter. With long-run inflation expectations stable and substantial slack in labor and product markets anticipated to persist over the forecast period, the staff continued to project that inflation would be subdued in 2012 and 2013. Participants' Views on Current Conditions and the Economic Outlook In their discussion of the economic situation and outlook, meeting participants agreed that the information received since their previous meeting indicated that economic activity was expanding at a moderate rate, notwithstanding some apparent slowing in global economic growth. Consumer spending continued to advance, but business fixed investment appeared to be decelerating, and home sales and construction remained at very low levels. Labor market conditions improved some in recent months, but the unemployment rate remained elevated despite a noticeable drop in November. Inflation moderated from the rates earlier in the year, and longer-term inflation expectations remained stable. Regarding the economic outlook, participants continued to anticipate that economic activity would expand at a moderate rate in the coming quarters and that, consequently, the unemployment rate would decline only gradually. The factors that participants cited as likely to restrain the pace of the economic expansion included an expectation that financial markets would remain unsettled until the fiscal and banking issues in the euro area were more fully addressed. Other factors that were expected to weigh on the pace of economic activity were the slowdown of economic activity abroad, fiscal tightening in the United States, high levels of uncertainty among households and businesses, the weak housing market, and household deleveraging. In assessing the economic outlook, participants judged that strains in global financial markets continued to pose significant downside risks. With the rate of increase in economic activity anticipated to remain moderate, most participants expected that inflation would settle over coming quarters at or below levels consistent with their estimates of its longer-run mandate-consistent rate. In discussing the household sector, meeting participants generally commented that consumer spending in recent months had been stronger than expected, and several reported cautious optimism among some of their business contacts about prospects for the holiday shopping season. A few participants thought that the recent strength in motor vehicle sales and other consumer spending could reflect pent-up demand from households for goods and services, and so thought that it might persist for a time. However, others noted that real disposable personal income had weakened and that households remained pessimistic about their income prospects and uncertain about the economic outlook. As a result, a number of those participants suggested that the recent stronger pace of consumer spending might not be sustained. Moreover, some participants mentioned that households were likely still adjusting to the loss of wealth over the past few years, which would weigh on consumer spending going forward. Participants generally saw few signs of recovery in the housing market, with house prices continuing to decline in most areas and the overhang of foreclosed and distressed properties still substantial. Several participants observed that the ongoing weakness in the housing market came despite low borrowing rates and government initiatives to resolve problems in the foreclosure process. However, one participant noted that some homebuilders were reporting that land prices were edging up and that financing was available from nontraditional sources, suggesting that conditions in the housing market could be improving. Reports from business contacts indicated that, in addition to the rise in consumer spending, activity in the manufacturing, energy, and agriculture sectors continued to advance in recent months. Nonetheless, businesses generally reported that they remained cautious regarding capital spending and hiring because of a high level of uncertainty about the economic outlook and the political environment. In particular, some contacts raised concerns about the uncertain fiscal outlook in the United States or the possible drag on sales and production from an economic slowdown abroad, while others cited uncertainty about the cost implications of potential changes in regulatory policies. Several participants noted that their contacts had ready access to credit at attractive rates. However, some participants continued to view credit as tight, particularly in mortgage markets or among small businesses in their Districts that were facing difficulties meeting collateral requirements and obtaining bank loans. A number of recent indicators showed some improvement in labor market conditions:  Payroll employment had posted moderate gains for five months, new claims for unemployment insurance had drifted lower, and the unemployment rate had turned down. One participant noted that the series of upward revisions to the initial estimates of payroll employment in recent months was an encouraging sign of sustained hiring, although several participants remarked that they saw the labor market as still improving only slowly. Others indicated that because part of the recent decline in the jobless rate was associated with a reduction in labor force participation, the drop in the unemployment rate likely overstated the overall improvement in the labor market.  Moreover, unemployment, particularly longer-term unemployment, remained high, and the number of involuntary part-time workers was still elevated. Some participants again expressed concern that the persistence of high levels of long-duration unemployment and the underutilization of the workforce could eventually lead to a loss of skills and an erosion of potential output.  Another participant suggested that the unemployment rate was a more useful indicator of cyclical labor market developments than the level of employment relative to the size of the population, which was more likely to be influenced by structural changes in labor demand and supply.  Participants expressed a range of views on the current extent of slack in the labor market. It was noted that because of factors including ongoing changes in the composition of available jobs and workers' skills, some part of the increase in unemployment since the beginning of the recession had been structural rather than cyclical. Others pointed out that the very modest increases in labor compensation of late suggested that underutilization of labor was still significant. Meeting participants observed that financial markets remained volatile over the intermeeting period in large part because of developments in Europe. Participants noted the recent moves by the European authorities to strengthen their commitment to fiscal discipline and to provide greater resources to backstop sovereign debt issuance. But many anticipated that further efforts to implement and perhaps to augment these policies would be necessary to fully resolve the area's fiscal and financial problems and commented that financial markets would remain focused on the situation in Europe as it evolves. It was noted that the changes to the central bank currency swap lines announced in late November helped to ease dollar funding conditions facing European institutions, but such conditions were still strained. However, participants generally saw little evidence of significant new constraints on credit availability for domestic borrowers. The balance sheets of most U.S. banks appeared to have improved somewhat, and domestic banks reported increases in commercial lending, even as some European lenders were pulling back. Several participants commented on strains affecting some community banks, which reportedly had led to tighter credit conditions for their small business clients. Participants observed that inflation had moderated in recent months as the effects of the earlier run-up in commodity prices subsided. Retail prices of gasoline had declined, and prices of non-oil imported goods had softened. In addition, labor compensation had risen only slowly, and productivity continued to rise. Some business contacts suggested that pricing pressures had diminished. Longer-run inflation expectations were still well anchored. Most participants anticipated that inflation would continue to moderate. Although some energy prices had recently increased, many participants judged that the favorable trends in commodity prices might persist in the near term, particularly in light of softer global activity, and one noted that expanded crop production, if realized, would hold down agricultural prices. More broadly, many participants judged that the moderate expansion in economic activity that they were projecting and the associated gradual reduction in the current wide margins of slack in labor and product markets would be consistent with subdued inflation going forward. Indeed, some expressed the concern that, with the persistence of considerable resource slack, inflation might run below mandate-consistent levels for some time. However, a couple of participants noted that the rate of inflation over the past year had not fallen as much as would be expected if the gap in resource utilization were large, suggesting that the level of potential output was lower than some current estimates. Some participants were concerned that inflation could rise as the recovery continued, and some business contacts had reported that producers expected to see an increase in pricing power over time. A few participants argued that maintaining a highly accommodative stance of monetary policy over the medium run would erode the stability of inflation expectations. Committee Policy Action Members viewed the information on U.S. economic activity received over the intermeeting period as suggesting that the economy was expanding moderately. While overall labor market conditions had improved some in recent months, the unemployment rate remained elevated relative to levels that the Committee anticipated would prevail in the longer run. Inflation had moderated, and longer-term inflation expectations remained stable. However, available indicators pointed to some slowing in the pace of economic growth in Europe and in some emerging market economies. Members continued to expect a moderate pace of economic growth over coming quarters, with the unemployment rate declining only gradually toward levels consistent with the Committee's dual mandate. Strains in global financial markets continued to pose significant downside risks to economic activity. Members also anticipated that inflation would settle, over coming quarters, at levels at or below those consistent with the dual mandate. In their discussion of monetary policy for the period ahead, Committee members generally agreed that their overall assessments of the economic outlook had not changed greatly since their previous meeting. As a result, almost all members agreed to maintain the existing stance of monetary policy at this meeting. In particular, they agreed to continue the program of extending the average maturity of the Federal Reserve's holdings of securities as announced in September, to retain the existing policies regarding the reinvestment of principal payments from Federal Reserve holdings of securities, and to keep the target range for the federal funds rate at 0 to 1/4  percent. With regard to the forward guidance to be included in the statement to be released following the meeting, several members noted that the reference to mid-2013 might need to be adjusted before long. A number of members noted their dissatisfaction with the Committee's current approach for communicating its views regarding the appropriate path for monetary policy, and looked forward to considering possible enhancements to the Committee's communications. For now, however, the Committee agreed to reiterate its anticipation that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.  A number of members indicated that current and prospective economic conditions could well warrant additional policy accommodation, but they believed that any additional actions would be more effective if accompanied by enhanced communication about the Committee's longer-run economic goals and policy framework. A few others continued to judge that maintaining the current degree of policy accommodation beyond the near term would likely be inappropriate given their outlook for economic activity and inflation, or questioned the efficacy of additional monetary policy actions in light of the nonmonetary headwinds restraining the recovery. For this meeting, almost all members were willing to support maintaining the existing policy stance while emphasizing the importance of carefully monitoring economic developments given the uncertainties and risks attending the outlook. One member preferred to undertake additional accommodation at this meeting and dissented from the policy decision. With respect to the statement, members agreed that only relatively small modifications were needed to reflect the modest changes to economic conditions seen in the recent data and to note that the Committee would continue to implement its policy steps from recent meetings. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to continue the maturity extension program it began in September to purchase, by the end of June 2012, Treasury securities with remaining maturities of approximately 6 years to 30 years with a total face value of $400 billion, and to sell Treasury securities with remaining maturities of 3 years or less with a total face value of $400 billion. The Committee also directs the Desk to maintain its existing policies of rolling over maturing Treasury securities into new issues and of reinvesting principal payments on all agency debt and agency mortgage-backed securities in the System Open Market Account in agency mortgage-backed securities in order to maintain the total face value of domestic securities at approximately $2.6 trillion. The Committee directs the Desk to engage in dollar roll transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability." The vote encompassed approval of the statement below to be released at 2:15 p.m.: "Information received since the Federal Open Market Committee met in November suggests that the economy has been expanding moderately, notwithstanding some apparent slowing in global growth. While indicators point to some improvement in overall labor market conditions, the unemployment rate remains elevated. Household spending has continued to advance, but business fixed investment appears to be increasing less rapidly and the housing sector remains depressed. Inflation has moderated since earlier in the year, and longer-term inflation expectations have remained stable. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect a moderate pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee's dual mandate. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations. To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate. The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools to promote a stronger economic recovery in a context of price stability." Voting for this action:  Ben Bernanke, William C. Dudley, Elizabeth Duke, Richard W. Fisher, Narayana Kocherlakota, Charles I. Plosser, Sarah Bloom Raskin, Daniel K. Tarullo, and Janet L. Yellen. Voting against this action:  Charles L. Evans. Mr. Evans dissented because he continued to view additional policy accommodation as appropriate in circumstances where his outlook was for growth to be too slow to make sufficient progress in reducing the unemployment rate and for inflation to drop below levels consistent with the Committee's dual mandate. He continued to support the use of more-explicit forward guidance about the economic conditions under which the federal funds rate could be maintained in its current range, and he suggested that the Committee also consider additional asset purchases. Monetary Policy Communications After the Committee's vote, participants turned to a further consideration of ways in which the Committee might enhance the clarity and transparency of its public communications. The subcommittee on communications recommended an approach for incorporating information about participants' projections of appropriate future monetary policy into the Summary of Economic Projections (SEP), which the FOMC releases four times each year. In the SEP, participants' projections for economic growth, unemployment, and inflation are conditioned on their individual assessments of the path of monetary policy that is most likely to be consistent with the Federal Reserve's statutory mandate to promote maximum employment and price stability, but information about those assessments has not been included in the SEP. A staff briefing described the details of the subcommittee's recommended approach and compared it with those taken by several other central banks. Most participants agreed that adding their projections of the target federal funds rate to the economic projections already provided in the SEP would help the public better understand the Committee's monetary policy decisions and the ways in which those decisions depend on members' assessments of economic and financial conditions. One participant suggested that the economic projections would be more understandable if they were based on a common interest rate path. Another suggested that it would be preferable to publish a consensus policy projection of the entire Committee. Some participants expressed concern that publishing information about participants' individual policy projections could confuse the public; for example, they saw an appreciable risk that the public could mistakenly interpret participants' projections of the target federal funds rate as signaling the Committee's intention to follow a specific policy path rather than as indicating members' conditional projections for the federal funds rate given their expectations regarding future economic developments. Most participants viewed these concerns as manageable; several noted that participants would have opportunities to explain their projections and policy views in speeches and other forms of communication. Nonetheless, some participants did not see providing policy projections as a useful step at this time. At the conclusion of their discussion, participants decided to incorporate information about their projections of appropriate monetary policy into the SEP beginning in January. Specifically, the SEP will include information about participants' projections of the appropriate level of the target federal funds rate in the fourth quarter of the current year and the next few calendar years, and over the longer run; the SEP also will report participants' current projections of the likely timing of the first increase in the target rate given their projections of future economic conditions. An accompanying narrative will describe the key factors underlying those assessments as well as qualitative information regarding participants' expectations for the Federal Reserve's balance sheet. A number of participants suggested further enhancements to the SEP; the Chairman asked the subcommittee to explore such enhancements over coming months. Following up on the Committee's discussion of policy frameworks at its November meeting, the subcommittee on communications presented a draft statement of the Committee's longer-run goals and policy strategy. Participants generally agreed that issuing such a statement could be helpful in enhancing the transparency and accountability of monetary policy and in facilitating well-informed decisionmaking by households and businesses, and thus in enhancing the Committee's ability to promote the goals specified in its statutory mandate in the face of significant economic disturbances. However, a couple of participants expressed the concern that a statement that was sufficiently nuanced to capture the diversity of views on the Committee might not, in fact, enhance public understanding of the Committee's actions and intentions. Participants commented on the draft statement, and the Chairman encouraged the subcommittee to make adjustments to the draft and to present a revised version for the Committee's further consideration in January. It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, January 24-25, 2012. The meeting adjourned at 4:00 p.m. on December 13, 2011. Videoconference Meeting of November 28 On November 28, 2011, the Committee met by videoconference to discuss a proposal to amend and augment the Federal Reserve's temporary liquidity swap arrangements with foreign central banks in light of strains in global financial markets. The proposal included a six-month extension of the sunset date and a 50 basis point reduction in the pricing on the existing liquidity swap arrangements with the Bank of Canada, the Bank of England, the Bank of Japan, the ECB, and the Swiss National Bank, as well as the establishment, as a contingency measure, of swap arrangements that would allow the Federal Reserve to provide liquidity in the currencies of the foreign central banks should the need arise. The proposal was aimed at helping to ease strains in financial markets and thereby to mitigate the effects of such strains on the supply of credit to U.S. households and businesses, in support of the economic recovery. The staff provided briefings on financial and economic developments in Europe. In recent weeks, financial markets appeared to have become increasingly concerned that a timely resolution of the European sovereign debt situation might not occur despite the measures that authorities there announced in October; pressures on European sovereign debt markets had increased, and conditions in European funding markets had deteriorated appreciably. The greater financial stress appeared likely to damp economic activity in the euro area and could pose a risk to the economic recovery in the United States. Meeting participants discussed a range of considerations surrounding the proposed changes to the swap arrangements. Most participants agreed that such changes would represent an important demonstration of the commitment of the Federal Reserve and the other central banks to work together to support the global financial system. Some participants indicated that, although they did not anticipate that usage would necessarily be heavy, they felt that lower pricing on the existing swap lines could reduce the possible stigma associated with the use of the lines by financial institutions borrowing dollars from the foreign central banks, and so would contribute to improved functioning in dollar funding markets in Europe and elsewhere. A few noted that the risks associated with the swap lines were low because the Federal Reserve's counterparties would be the foreign central banks themselves, and the foreign central banks would be responsible for the loans to banks in their jurisdictions. However, some participants commented that the proposed changes to the swap lines would not by themselves address the need for additional policy action by European authorities. Several participants questioned whether the changes to the swap lines were necessary at this time and worried that such changes could be seen as suggesting greater concern about financial strains than was warranted. It was also noted that the proposed reduction in pricing of the existing swap arrangements could put the cost of dollar borrowing from foreign central banks below the Federal Reserve's primary credit rate and that non-U.S. banks might be perceived to have an advantage in meeting their short-term funding needs as a result. However, U.S. banks did not face difficulties obtaining liquidity in short-term funding markets, and some participants felt that a cut in the primary credit rate at the present time might incorrectly be seen as suggesting concern about U.S. financial conditions. At the conclusion of the discussion, all but one member agreed to support the changes to the existing swap line arrangements and the establishment of the new foreign currency swap agreements and approved the following resolution: "The Federal Open Market Committee directs the Federal Reserve Bank of New York to extend the existing temporary reciprocal currency arrangements ("swap arrangements") for the System Open Market Account with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank through February 1, 2013. In addition, the Federal Open Market Committee authorizes the Federal Reserve Bank of New York to enter into additional swap arrangements for the System Open Market Account with the Bank of Canada, Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank to support the provision by the Federal Reserve of liquidity in Canadian dollars, British pounds, Japanese yen, euros, and Swiss francs. The swap arrangements for provision of liquidity in each of those currencies shall be subject to the same size limits, if any, currently in force for the swap arrangements for provision of liquidity in U.S. dollars to that foreign central bank. These arrangements shall terminate on February 1, 2013. Requests for drawings on the foreign currency swap lines and distribution of the proceeds to U.S. financial institutions shall be initiated by the appropriate Reserve Bank and approved by the Chairman in consultation with the Foreign Currency Subcommittee. The Foreign Currency Subcommittee will consult with the Federal Open Market Committee prior to the initial drawing on the foreign currency swap lines if possible under the circumstances then prevailing. The Chairman shall establish the rates on the swap arrangements by mutual agreement with the foreign central banks and in consultation with the Foreign Currency Subcommittee. He shall keep the Federal Open Market Committee informed, and the rates shall be consistent with principles discussed with and guidance provided by the Committee." Voting for this action:  Ben Bernanke, William C. Dudley, Elizabeth Duke, Charles L. Evans, Richard W. Fisher, Narayana Kocherlakota, Sarah Bloom Raskin, Daniel K. Tarullo, and Janet L. Yellen. Voting against this action:  Jeffrey M. Lacker. Mr. Lacker voted as alternate member for Mr. Plosser at this meeting. Mr. Lacker dissented because of his opposition to arrangements that support Federal Reserve lending in foreign currencies, which he viewed as amounting to fiscal policy. He also opposed lowering the interest rate on swap arrangements to below the primary credit rate. Notation Vote By notation vote completed on November 21, 2011, the Committee unanimously approved the minutes of the FOMC meeting held on November 1-2, 2011.   _____________________________ William B. English Secretary Return to top

2011-12-13

Statement

Information received since the Federal Open Market Committee met in November suggests that the economy has been expanding moderately, notwithstanding some apparent slowing in global growth. While indicators point to some improvement in overall labor market conditions, the unemployment rate remains elevated. Household spending has continued to advance, but business fixed investment appears to be increasing less rapidly and the housing sector remains depressed. Inflation has moderated since earlier in the year, and longer-term inflation expectations have remained stable. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect a moderate pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee’s dual mandate. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations. To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate. The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools to promote a stronger economic recovery in a context of price stability. Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Richard W. Fisher; Narayana Kocherlakota; Charles I. Plosser; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was Charles L. Evans, who supported additional policy accommodation at this time.

N/A

Minute

A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held in the offices of the Board of Governors in Washington, D.C., on Tuesday, December 13, 2011, at 8:30 a.m. PRESENT: Ben Bernanke, Chairman William C. Dudley, Vice Chairman Elizabeth Duke Charles L. Evans Richard W. Fisher Narayana Kocherlakota Charles I. Plosser Sarah Bloom Raskin Daniel K. Tarullo Janet L. Yellen Christine Cumming, Jeffrey M. Lacker, Dennis P. Lockhart, Sandra Pianalto, and John C. Williams, Alternate Members of the Federal Open Market Committee James Bullard, Esther L. George, and Eric Rosengren, Presidents of the Federal Reserve Banks of St. Louis, Kansas City, and Boston, respectively William B. English, Secretary and Economist Deborah J. Danker, Deputy Secretary Matthew M. Luecke, Assistant Secretary David W. Skidmore, Assistant Secretary Michelle A. Smith, Assistant Secretary Scott G. Alvarez, General Counsel Thomas C. Baxter, Deputy General Counsel Steven B. Kamin, Economist David W. Wilcox, Economist Thomas A. Connors, Loretta J. Mester, Simon Potter, David Reifschneider, Harvey Rosenblum, and Lawrence Slifman, Associate Economists Brian Sack, Manager, System Open Market Account Jennifer J. Johnson, Secretary of the Board, Office of the Secretary, Board of Governors Robert deV. Frierson, Deputy Secretary, Office of the Secretary, Board of Governors Maryann F. Hunter, Deputy Director, Division of Banking Supervision and Regulation, Board of Governors; William Wascher, Deputy Director, Division of Research and Statistics, Board of Governors Andreas Lehnert, Deputy Director, Office of Financial Stability Policy and Research, Board of Governors Andrew T. Levin, Special Advisor to the Board, Office of Board Members, Board of Governors Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors Seth B. Carpenter, Senior Associate Director, Division of Monetary Affairs, Board of Governors; Michael P. Leahy, Senior Associate Director, Division of International Finance, Board of Governors Ellen E. Meade, Stephen A. Meyer, and Joyce K. Zickler, Senior Advisers, Division of Monetary Affairs, Board of Governors Eric M. Engen, Michael T. Kiley, and Michael G. Palumbo, Associate Directors, Division of Research and Statistics, Board of Governors David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors Penelope A. Beattie, Assistant to the Secretary, Office of the Secretary, Board of Governors Gordon Werkema, First Vice President, Federal Reserve Bank of Chicago Jeff Fuhrer and Mark S. Sniderman, Executive Vice Presidents, Federal Reserve Banks of Boston and Cleveland, respectively David Altig, Alan D. Barkema, Richard P. Dzina, Spencer Krane, and Christopher J. Waller, Senior Vice Presidents, Federal Reserve Banks of Atlanta, Kansas City, New York, Chicago, and St. Louis, respectively Mary C. Daly, Group Vice President, Federal Reserve Bank of San Francisco Alexander L. Wolman, Senior Economist and Research Advisor, Federal Reserve Bank of Richmond Samuel Schulhofer-Wohl, Senior Economist, Federal Reserve Bank of Minneapolis By unanimous vote, the Committee selected Steven B. Kamin to serve as Economist until the selection of a successor at the first regularly scheduled meeting of the Committee in 2012. Developments in Financial Markets and the Federal Reserve's Balance Sheet The Manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets during the period since the Federal Open Market Committee (FOMC) met on November 1–2, 2011. He also reported on System open market operations, including the ongoing reinvestment into agency-guaranteed mortgage-backed securities (MBS) of principal payments received on SOMA holdings of agency debt and agency-guaranteed MBS as well as the operations related to the maturity extension program authorized at the September 20–21 FOMC meeting. By unanimous vote, the Committee ratified the Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account over the intermeeting period. Staff Review of the Economic Situation The information reviewed at the December 13 meeting indicated that U.S. economic activity expanded moderately despite some apparent slowing in the growth of foreign economies and strains in global financial markets. Conditions in the labor market seemed to have improved somewhat, while overall consumer price inflation continued to be more modest than earlier in the year and measures of long-run inflation expectations remained stable. The unemployment rate dropped to 8.6 percent in November, and private nonfarm employment continued to increase moderately during the past two months. Nevertheless, employment at state and local governments declined further, and both long-duration unemployment and the share of workers employed part time for economic reasons remained elevated. Initial claims for unemployment insurance moved down, on net, since early November but were still at a level consistent with only modest employment gains, and indicators of job openings and businesses' hiring plans were little changed. Industrial production rose in October, reflecting in part a rebound in motor vehicle production from the effects of supply chain disruptions earlier in the year. Factory output outside of the motor vehicle sector also continued to rise, and the rate of manufacturing capacity utilization moved up. However, motor vehicle assemblies were scheduled to only edge higher, on balance, in the coming months, and broader indicators of manufacturing activity, such as the diffusion indexes of new orders from the national and regional manufacturing surveys, were at levels that suggested only modest increases in production in the near term. Revised estimates indicated that households' real disposable income declined in the second and third quarters, and the net wealth of households decreased in the third quarter. Nonetheless, overall real personal consumption expenditures (PCE) rose modestly in October following significant gains in the previous month, as spending for consumer goods continued to increase at a strong pace while outlays for consumer services were roughly flat. In November, nominal retail sales, excluding purchases at motor vehicle and parts outlets, expanded further, and sales of light motor vehicles stepped up. But consumer sentiment was still at a subdued level in early December despite some improvement in recent months. Activity in the housing market continued to be depressed by the substantial inventory of foreclosed and distressed properties and by weak demand that reflected tight credit conditions for mortgage loans and uncertainty about future home prices. Starts and permits for new single-family homes in October stayed around the low levels that prevailed since the middle of last year. Sales of new and existing homes remained slow in recent months, and home prices moved down further. Real business spending on equipment and software seemed to be decelerating. Nominal orders and shipments of nondefense capital goods excluding aircraft edged down in October, and the slowing accumulation of unfilled orders suggested that increases in outlays for business equipment would be muted in subsequent months. Also, survey measures of business conditions and sentiment remained at relatively downbeat levels in November. Real business spending for nonresidential construction moved up in October but was still at a low level, reflecting high vacancy rates and restricted credit conditions for construction loans. Inventories in most industries looked to be reasonably well aligned with sales, although motor vehicle stocks continued to be lean. In the government sector, real federal defense purchases appeared to have stepped down in October and November from their level in the third quarter. At the state and local level, real purchases seemed to be decreasing at a slower pace in recent months than earlier in the year. The U.S. international trade deficit narrowed in October, as imports decreased more than exports. Declines in imports of petroleum products (reflecting lower prices and lesser volumes), non-oil industrial supplies, and automotive products more than offset increases in capital goods, consumer goods, and food. Reductions in exports of industrial supplies and consumer goods, led by a few particularly volatile components, outweighed the gains in capital goods. Inflation continued to decrease relative to earlier in the year. Indeed, the PCE price index edged down in October. Consumer prices for energy decreased, and survey data indicated that gasoline prices declined further in November. Increases in consumer food prices in October were substantially slower than the average pace in the preceding months of this year. Consumer prices excluding food and energy also continued to rise at a more modest pace in October than earlier in the year. Near-term inflation expectations from the Thomson Reuters/University of Michigan Surveys of Consumers declined in early December, and longer-term inflation expectations remained stable. Measures of labor compensation indicated that nominal wage gains continued to be subdued. Compensation per hour in the nonfarm business sector increased moderately over the year ending in the third quarter, while the 12-month change in average hourly earnings for all employees remained low in October and November. Unit labor costs edged up over the past four quarters. Foreign economic growth, especially in the euro area, appeared to weaken in recent months. Real gross domestic product (GDP) in the euro area barely edged up in the third quarter. Moreover, industrial production in the region fell sharply in September, and indicators of manufacturing activity in October and November pointed to lower output. Measures of business and consumer confidence in the euro area continued to decline in recent months. In other advanced foreign economies, real GDP in Japan rebounded in the third quarter from the effects of the earthquake in March, and real GDP recovered in Canada as oil production picked up after several months of shutdowns; however, available indicators of manufacturing activity in both of these economies pointed to declines during the fourth quarter. Among emerging market economies, real GDP in Brazil was flat in the third quarter, while exports from China slowed in recent months, although Chinese domestic demand appeared to remain strong. Staff Review of the Financial Situation The risks associated with the fiscal and financial difficulties in Europe remained the focus of attention in financial markets over the intermeeting period and contributed to heightened volatility in a wide range of asset markets. Investor concerns about developments in Europe intensified early in the period but subsequently eased a bit amid signs that European authorities were moving toward agreement on a comprehensive framework to address fiscal and financial vulnerabilities and after the Federal Reserve and five other major central banks announced enhanced currency swap arrangements, including lower charges on existing dollar liquidity swap lines. Nevertheless, investors appeared to remain cautious. Yields on nominal Treasury securities were little changed following the release of the November FOMC statement. Over the following weeks, movements in yields were reportedly driven by shifts in investors' assessments of the European situation and by U.S. economic data that were somewhat stronger than they expected. Both short-term nominal Treasury yields and the expected path of the federal funds rate implied by money market futures quotes were essentially unchanged, on balance, over the intermeeting period, while longer-dated Treasury yields ended the period slightly higher. Yields on current-coupon agency MBS also ended the period about unchanged. Indicators of inflation expectations derived from nominal and inflation-protected Treasury securities posted mixed changes, on net, over the period and remained at the low end of their recent ranges. Early in the intermeeting period, conditions in short-term wholesale funding markets appeared to deteriorate somewhat. Following the six major central banks' currency swap announcement, some measures of short-term funding costs moderated, but they remained elevated. In dollar funding markets, the spread of the three-month London interbank offered rate (Libor) over the overnight index swap (OIS) rate of the same maturity widened noticeably during the intermeeting period. Some European financial institutions reportedly faced significant pressures in unsecured dollar funding markets. By contrast, in secured funding markets, spreads on asset-backed commercial paper were relatively steady for U.S. and most European-based issuers, and rates on repurchase agreements across various types of collateral were stable. In the December 2011 Senior Credit Officer Opinion Survey on Dealer Financing Terms, dealers reported a moderate tightening of credit terms over the preceding three months on securities financing transactions and over-the-counter derivatives markets trades, particularly for financial counterparties. Dealers also noted that demand for funding all types of securities decreased over the same reference period. Credit default swap (CDS) spreads and equity prices of large U.S. banking organizations remained volatile over the intermeeting period. While the S&P 500 index ended the period slightly higher, on net, equity prices for most major U.S. banking firms were lower and their CDS spreads widened.  CDS spreads for European banks remained elevated as these institutions faced increasingly strained conditions in short-term funding markets. In the wake of the bankruptcy of MF Global, market participants also expressed renewed concerns about securities dealers that rely heavily on short-term wholesale funding markets, particularly those institutions not affiliated with commercial banking institutions. Yields on investment-grade and speculative-grade corporate bonds rose, on balance, over the period, and their spreads over yields on comparable-maturity Treasury securities were somewhat wider. The debt of nonfinancial firms increased in November, with corporate bond issuance particularly robust, as some firms reportedly were eager to issue bonds before year-end. Nonfinancial commercial paper outstanding and commercial and industrial loans continued to expand at a moderate pace. In the leveraged loan market, the extension of loans stepped up somewhat in November but remained sluggish relative to its average pace earlier in the year. Financing conditions for commercial real estate appeared to remain strained over the intermeeting period. Issuance of commercial mortgage-backed securities (CMBS) was light amid deteriorating liquidity conditions in the CMBS market. Prices of most types of commercial properties continued to be depressed, while both vacancy rates and delinquency rates for commercial properties stayed close to their recent highs. Interest rates on residential mortgages were little changed, on net, over the intermeeting period and remained at historically low levels. But low mortgage rates appeared to have only modest effects on the rate of mortgage refinancing, likely because of tight underwriting standards and low levels of home equity. Indicators of home prices and the credit quality of older mortgage loans remained weak. The rate of newly delinquent prime mortgages--the pace at which mortgages transition from "current" to delinquent--seemed to have slowed,  but overall delinquency rates on residential mortgages remained elevated. Market reaction to the announcements by Fannie Mae and Freddie Mac on November 15 regarding the expansion of the Home Affordable Refinance Program was limited. Consumer credit rose slightly in the third quarter. The aggregate volume of credit card solicitations in recent months remained at levels comparable to those before the financial crisis in 2008, though the volume sent to low-income households was still well below the levels at that time. Meanwhile, consumer credit quality improved further in recent months, with delinquency rates on credit card loans declining nearly to historical lows and delinquency rates on nonrevolving credit at commercial banks retreating to pre-crisis levels. Issuance of consumer credit asset-backed securities increased substantially in November. M2 expanded at a solid pace in November, likely reflecting increased demand for safe and liquid assets, given concerns over European financial developments. In part, offshore deposits, which are no longer excluded from the Federal Deposit Insurance Corporation assessment base, appeared to be shifting to onshore offices. In contrast, the monetary base declined in November. Although currency increased at a robust pace, reserve balances declined by more, reflecting a temporary decrease in the size of the SOMA as a result of lags in the settlement of MBS reinvestment transactions. Over most of November, yields on many euro-area sovereign bonds--including those of Italy, Spain, Belgium, and France--along with yields on debt issued by the European Financial Stability Facility, rose sharply relative to the yield on German government bonds. But these spreads subsequently narrowed in anticipation of the European Union (EU) summit meeting on December 9 and in reaction to the swap announcement by the Federal Reserve and the other central banks on November 30. Near the end of the period, sovereign spreads widened again amid market participants' apparent concerns that the actions announced at the EU summit would prove to be less effective than they previously had anticipated. Spreads of yields on most peripheral euro-area countries' debt over yields on German debt ended the period higher on net. German sovereign yields increased as well. Implied basis spreads from the foreign exchange swap market rose substantially over November, but reversed a portion of that increase immediately following the central banks' swap announcement. Against the background of higher dollar funding costs in the market and the reduction in the charge on dollar liquidity swaps, demand at the tender by the European Central Bank (ECB) of three-month dollar liquidity in December jumped to more than $50 billion from less than $500 million at the November auction. Euro funding pressures also moved higher over the period, with euro Libor--OIS spreads continuing to rise. In addition, maturities for repurchase agreements involving sovereign bonds of euro-area countries other than Germany reportedly shortened. Several European banks announced large declines in third-quarter profits, in part reflecting write-downs of their holdings of Greek sovereign debt. Equity prices in both advanced and emerging market economies fluctuated widely, with advanced country equities little changed, on net, and emerging market equities ending the period lower. The foreign exchange value of the dollar appreciated, on balance, over the intermeeting period. With inflationary pressures waning and the downside risks to the global economic outlook increasing, some central banks eased policy. China's central bank cut its reserve requirements by 50 basis points, and the central bank of Brazil lowered its policy rate by the same amount. The ECB reduced its minimum bid rate by 25 basis points at both its November and December meetings, relaxed its collateral and reserve requirements, and stated that it would begin to offer three-year funds at fixed rates. As a precautionary measure, the Bank of England announced a new liquidity facility that will auction term sterling funds against a wide range of collateral. Staff Economic Outlook In the economic forecast prepared for the December FOMC meeting, the staff's projection for the increase in real GDP in the near term was little changed, as the recent data on spending, production, and the labor market were, on balance, in line with the staff's expectations at the time of the previous forecast. However, the medium-term projection for real GDP growth in the December forecast was lower than the one presented in November, primarily reflecting revisions to the staff's view regarding developments in Europe and their implications for the U.S. economy. Nonetheless, the staff continued to project that the pace of economic activity would pick up gradually in 2012 and 2013, supported by accommodative monetary policy, further increases in credit availability, and improvements in consumer and business sentiment. Over the forecast period, the gains in real GDP were anticipated to be sufficient to reduce the slack in product and labor markets only slowly, and the unemployment rate was expected to remain elevated at the end of 2013. The staff's projection for inflation was little changed from the forecast prepared for the November FOMC meeting. The upward pressure on consumer prices from the increases in commodity and import prices earlier in the year was expected to continue to subside in the current quarter. With long-run inflation expectations stable and substantial slack in labor and product markets anticipated to persist over the forecast period, the staff continued to project that inflation would be subdued in 2012 and 2013. Participants' Views on Current Conditions and the Economic Outlook In their discussion of the economic situation and outlook, meeting participants agreed that the information received since their previous meeting indicated that economic activity was expanding at a moderate rate, notwithstanding some apparent slowing in global economic growth. Consumer spending continued to advance, but business fixed investment appeared to be decelerating, and home sales and construction remained at very low levels. Labor market conditions improved some in recent months, but the unemployment rate remained elevated despite a noticeable drop in November. Inflation moderated from the rates earlier in the year, and longer-term inflation expectations remained stable. Regarding the economic outlook, participants continued to anticipate that economic activity would expand at a moderate rate in the coming quarters and that, consequently, the unemployment rate would decline only gradually. The factors that participants cited as likely to restrain the pace of the economic expansion included an expectation that financial markets would remain unsettled until the fiscal and banking issues in the euro area were more fully addressed. Other factors that were expected to weigh on the pace of economic activity were the slowdown of economic activity abroad, fiscal tightening in the United States, high levels of uncertainty among households and businesses, the weak housing market, and household deleveraging. In assessing the economic outlook, participants judged that strains in global financial markets continued to pose significant downside risks. With the rate of increase in economic activity anticipated to remain moderate, most participants expected that inflation would settle over coming quarters at or below levels consistent with their estimates of its longer-run mandate-consistent rate. In discussing the household sector, meeting participants generally commented that consumer spending in recent months had been stronger than expected, and several reported cautious optimism among some of their business contacts about prospects for the holiday shopping season. A few participants thought that the recent strength in motor vehicle sales and other consumer spending could reflect pent-up demand from households for goods and services, and so thought that it might persist for a time. However, others noted that real disposable personal income had weakened and that households remained pessimistic about their income prospects and uncertain about the economic outlook. As a result, a number of those participants suggested that the recent stronger pace of consumer spending might not be sustained. Moreover, some participants mentioned that households were likely still adjusting to the loss of wealth over the past few years, which would weigh on consumer spending going forward. Participants generally saw few signs of recovery in the housing market, with house prices continuing to decline in most areas and the overhang of foreclosed and distressed properties still substantial. Several participants observed that the ongoing weakness in the housing market came despite low borrowing rates and government initiatives to resolve problems in the foreclosure process. However, one participant noted that some homebuilders were reporting that land prices were edging up and that financing was available from nontraditional sources, suggesting that conditions in the housing market could be improving. Reports from business contacts indicated that, in addition to the rise in consumer spending, activity in the manufacturing, energy, and agriculture sectors continued to advance in recent months. Nonetheless, businesses generally reported that they remained cautious regarding capital spending and hiring because of a high level of uncertainty about the economic outlook and the political environment. In particular, some contacts raised concerns about the uncertain fiscal outlook in the United States or the possible drag on sales and production from an economic slowdown abroad, while others cited uncertainty about the cost implications of potential changes in regulatory policies. Several participants noted that their contacts had ready access to credit at attractive rates. However, some participants continued to view credit as tight, particularly in mortgage markets or among small businesses in their Districts that were facing difficulties meeting collateral requirements and obtaining bank loans. A number of recent indicators showed some improvement in labor market conditions:  Payroll employment had posted moderate gains for five months, new claims for unemployment insurance had drifted lower, and the unemployment rate had turned down. One participant noted that the series of upward revisions to the initial estimates of payroll employment in recent months was an encouraging sign of sustained hiring, although several participants remarked that they saw the labor market as still improving only slowly. Others indicated that because part of the recent decline in the jobless rate was associated with a reduction in labor force participation, the drop in the unemployment rate likely overstated the overall improvement in the labor market.  Moreover, unemployment, particularly longer-term unemployment, remained high, and the number of involuntary part-time workers was still elevated. Some participants again expressed concern that the persistence of high levels of long-duration unemployment and the underutilization of the workforce could eventually lead to a loss of skills and an erosion of potential output.  Another participant suggested that the unemployment rate was a more useful indicator of cyclical labor market developments than the level of employment relative to the size of the population, which was more likely to be influenced by structural changes in labor demand and supply.  Participants expressed a range of views on the current extent of slack in the labor market. It was noted that because of factors including ongoing changes in the composition of available jobs and workers' skills, some part of the increase in unemployment since the beginning of the recession had been structural rather than cyclical. Others pointed out that the very modest increases in labor compensation of late suggested that underutilization of labor was still significant. Meeting participants observed that financial markets remained volatile over the intermeeting period in large part because of developments in Europe. Participants noted the recent moves by the European authorities to strengthen their commitment to fiscal discipline and to provide greater resources to backstop sovereign debt issuance. But many anticipated that further efforts to implement and perhaps to augment these policies would be necessary to fully resolve the area's fiscal and financial problems and commented that financial markets would remain focused on the situation in Europe as it evolves. It was noted that the changes to the central bank currency swap lines announced in late November helped to ease dollar funding conditions facing European institutions, but such conditions were still strained. However, participants generally saw little evidence of significant new constraints on credit availability for domestic borrowers. The balance sheets of most U.S. banks appeared to have improved somewhat, and domestic banks reported increases in commercial lending, even as some European lenders were pulling back. Several participants commented on strains affecting some community banks, which reportedly had led to tighter credit conditions for their small business clients. Participants observed that inflation had moderated in recent months as the effects of the earlier run-up in commodity prices subsided. Retail prices of gasoline had declined, and prices of non-oil imported goods had softened. In addition, labor compensation had risen only slowly, and productivity continued to rise. Some business contacts suggested that pricing pressures had diminished. Longer-run inflation expectations were still well anchored. Most participants anticipated that inflation would continue to moderate. Although some energy prices had recently increased, many participants judged that the favorable trends in commodity prices might persist in the near term, particularly in light of softer global activity, and one noted that expanded crop production, if realized, would hold down agricultural prices. More broadly, many participants judged that the moderate expansion in economic activity that they were projecting and the associated gradual reduction in the current wide margins of slack in labor and product markets would be consistent with subdued inflation going forward. Indeed, some expressed the concern that, with the persistence of considerable resource slack, inflation might run below mandate-consistent levels for some time. However, a couple of participants noted that the rate of inflation over the past year had not fallen as much as would be expected if the gap in resource utilization were large, suggesting that the level of potential output was lower than some current estimates. Some participants were concerned that inflation could rise as the recovery continued, and some business contacts had reported that producers expected to see an increase in pricing power over time. A few participants argued that maintaining a highly accommodative stance of monetary policy over the medium run would erode the stability of inflation expectations. Committee Policy Action Members viewed the information on U.S. economic activity received over the intermeeting period as suggesting that the economy was expanding moderately. While overall labor market conditions had improved some in recent months, the unemployment rate remained elevated relative to levels that the Committee anticipated would prevail in the longer run. Inflation had moderated, and longer-term inflation expectations remained stable. However, available indicators pointed to some slowing in the pace of economic growth in Europe and in some emerging market economies. Members continued to expect a moderate pace of economic growth over coming quarters, with the unemployment rate declining only gradually toward levels consistent with the Committee's dual mandate. Strains in global financial markets continued to pose significant downside risks to economic activity. Members also anticipated that inflation would settle, over coming quarters, at levels at or below those consistent with the dual mandate. In their discussion of monetary policy for the period ahead, Committee members generally agreed that their overall assessments of the economic outlook had not changed greatly since their previous meeting. As a result, almost all members agreed to maintain the existing stance of monetary policy at this meeting. In particular, they agreed to continue the program of extending the average maturity of the Federal Reserve's holdings of securities as announced in September, to retain the existing policies regarding the reinvestment of principal payments from Federal Reserve holdings of securities, and to keep the target range for the federal funds rate at 0 to 1/4  percent. With regard to the forward guidance to be included in the statement to be released following the meeting, several members noted that the reference to mid-2013 might need to be adjusted before long. A number of members noted their dissatisfaction with the Committee's current approach for communicating its views regarding the appropriate path for monetary policy, and looked forward to considering possible enhancements to the Committee's communications. For now, however, the Committee agreed to reiterate its anticipation that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.  A number of members indicated that current and prospective economic conditions could well warrant additional policy accommodation, but they believed that any additional actions would be more effective if accompanied by enhanced communication about the Committee's longer-run economic goals and policy framework. A few others continued to judge that maintaining the current degree of policy accommodation beyond the near term would likely be inappropriate given their outlook for economic activity and inflation, or questioned the efficacy of additional monetary policy actions in light of the nonmonetary headwinds restraining the recovery. For this meeting, almost all members were willing to support maintaining the existing policy stance while emphasizing the importance of carefully monitoring economic developments given the uncertainties and risks attending the outlook. One member preferred to undertake additional accommodation at this meeting and dissented from the policy decision. With respect to the statement, members agreed that only relatively small modifications were needed to reflect the modest changes to economic conditions seen in the recent data and to note that the Committee would continue to implement its policy steps from recent meetings. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to continue the maturity extension program it began in September to purchase, by the end of June 2012, Treasury securities with remaining maturities of approximately 6 years to 30 years with a total face value of $400 billion, and to sell Treasury securities with remaining maturities of 3 years or less with a total face value of $400 billion. The Committee also directs the Desk to maintain its existing policies of rolling over maturing Treasury securities into new issues and of reinvesting principal payments on all agency debt and agency mortgage-backed securities in the System Open Market Account in agency mortgage-backed securities in order to maintain the total face value of domestic securities at approximately $2.6 trillion. The Committee directs the Desk to engage in dollar roll transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability." The vote encompassed approval of the statement below to be released at 2:15 p.m.: "Information received since the Federal Open Market Committee met in November suggests that the economy has been expanding moderately, notwithstanding some apparent slowing in global growth. While indicators point to some improvement in overall labor market conditions, the unemployment rate remains elevated. Household spending has continued to advance, but business fixed investment appears to be increasing less rapidly and the housing sector remains depressed. Inflation has moderated since earlier in the year, and longer-term inflation expectations have remained stable. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect a moderate pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee's dual mandate. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations. To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate. The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools to promote a stronger economic recovery in a context of price stability." Voting for this action:  Ben Bernanke, William C. Dudley, Elizabeth Duke, Richard W. Fisher, Narayana Kocherlakota, Charles I. Plosser, Sarah Bloom Raskin, Daniel K. Tarullo, and Janet L. Yellen. Voting against this action:  Charles L. Evans. Mr. Evans dissented because he continued to view additional policy accommodation as appropriate in circumstances where his outlook was for growth to be too slow to make sufficient progress in reducing the unemployment rate and for inflation to drop below levels consistent with the Committee's dual mandate. He continued to support the use of more-explicit forward guidance about the economic conditions under which the federal funds rate could be maintained in its current range, and he suggested that the Committee also consider additional asset purchases. Monetary Policy Communications After the Committee's vote, participants turned to a further consideration of ways in which the Committee might enhance the clarity and transparency of its public communications. The subcommittee on communications recommended an approach for incorporating information about participants' projections of appropriate future monetary policy into the Summary of Economic Projections (SEP), which the FOMC releases four times each year. In the SEP, participants' projections for economic growth, unemployment, and inflation are conditioned on their individual assessments of the path of monetary policy that is most likely to be consistent with the Federal Reserve's statutory mandate to promote maximum employment and price stability, but information about those assessments has not been included in the SEP. A staff briefing described the details of the subcommittee's recommended approach and compared it with those taken by several other central banks. Most participants agreed that adding their projections of the target federal funds rate to the economic projections already provided in the SEP would help the public better understand the Committee's monetary policy decisions and the ways in which those decisions depend on members' assessments of economic and financial conditions. One participant suggested that the economic projections would be more understandable if they were based on a common interest rate path. Another suggested that it would be preferable to publish a consensus policy projection of the entire Committee. Some participants expressed concern that publishing information about participants' individual policy projections could confuse the public; for example, they saw an appreciable risk that the public could mistakenly interpret participants' projections of the target federal funds rate as signaling the Committee's intention to follow a specific policy path rather than as indicating members' conditional projections for the federal funds rate given their expectations regarding future economic developments. Most participants viewed these concerns as manageable; several noted that participants would have opportunities to explain their projections and policy views in speeches and other forms of communication. Nonetheless, some participants did not see providing policy projections as a useful step at this time. At the conclusion of their discussion, participants decided to incorporate information about their projections of appropriate monetary policy into the SEP beginning in January. Specifically, the SEP will include information about participants' projections of the appropriate level of the target federal funds rate in the fourth quarter of the current year and the next few calendar years, and over the longer run; the SEP also will report participants' current projections of the likely timing of the first increase in the target rate given their projections of future economic conditions. An accompanying narrative will describe the key factors underlying those assessments as well as qualitative information regarding participants' expectations for the Federal Reserve's balance sheet. A number of participants suggested further enhancements to the SEP; the Chairman asked the subcommittee to explore such enhancements over coming months. Following up on the Committee's discussion of policy frameworks at its November meeting, the subcommittee on communications presented a draft statement of the Committee's longer-run goals and policy strategy. Participants generally agreed that issuing such a statement could be helpful in enhancing the transparency and accountability of monetary policy and in facilitating well-informed decisionmaking by households and businesses, and thus in enhancing the Committee's ability to promote the goals specified in its statutory mandate in the face of significant economic disturbances. However, a couple of participants expressed the concern that a statement that was sufficiently nuanced to capture the diversity of views on the Committee might not, in fact, enhance public understanding of the Committee's actions and intentions. Participants commented on the draft statement, and the Chairman encouraged the subcommittee to make adjustments to the draft and to present a revised version for the Committee's further consideration in January. It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, January 24-25, 2012. The meeting adjourned at 4:00 p.m. on December 13, 2011. Videoconference Meeting of November 28 On November 28, 2011, the Committee met by videoconference to discuss a proposal to amend and augment the Federal Reserve's temporary liquidity swap arrangements with foreign central banks in light of strains in global financial markets. The proposal included a six-month extension of the sunset date and a 50 basis point reduction in the pricing on the existing liquidity swap arrangements with the Bank of Canada, the Bank of England, the Bank of Japan, the ECB, and the Swiss National Bank, as well as the establishment, as a contingency measure, of swap arrangements that would allow the Federal Reserve to provide liquidity in the currencies of the foreign central banks should the need arise. The proposal was aimed at helping to ease strains in financial markets and thereby to mitigate the effects of such strains on the supply of credit to U.S. households and businesses, in support of the economic recovery. The staff provided briefings on financial and economic developments in Europe. In recent weeks, financial markets appeared to have become increasingly concerned that a timely resolution of the European sovereign debt situation might not occur despite the measures that authorities there announced in October; pressures on European sovereign debt markets had increased, and conditions in European funding markets had deteriorated appreciably. The greater financial stress appeared likely to damp economic activity in the euro area and could pose a risk to the economic recovery in the United States. Meeting participants discussed a range of considerations surrounding the proposed changes to the swap arrangements. Most participants agreed that such changes would represent an important demonstration of the commitment of the Federal Reserve and the other central banks to work together to support the global financial system. Some participants indicated that, although they did not anticipate that usage would necessarily be heavy, they felt that lower pricing on the existing swap lines could reduce the possible stigma associated with the use of the lines by financial institutions borrowing dollars from the foreign central banks, and so would contribute to improved functioning in dollar funding markets in Europe and elsewhere. A few noted that the risks associated with the swap lines were low because the Federal Reserve's counterparties would be the foreign central banks themselves, and the foreign central banks would be responsible for the loans to banks in their jurisdictions. However, some participants commented that the proposed changes to the swap lines would not by themselves address the need for additional policy action by European authorities. Several participants questioned whether the changes to the swap lines were necessary at this time and worried that such changes could be seen as suggesting greater concern about financial strains than was warranted. It was also noted that the proposed reduction in pricing of the existing swap arrangements could put the cost of dollar borrowing from foreign central banks below the Federal Reserve's primary credit rate and that non-U.S. banks might be perceived to have an advantage in meeting their short-term funding needs as a result. However, U.S. banks did not face difficulties obtaining liquidity in short-term funding markets, and some participants felt that a cut in the primary credit rate at the present time might incorrectly be seen as suggesting concern about U.S. financial conditions. At the conclusion of the discussion, all but one member agreed to support the changes to the existing swap line arrangements and the establishment of the new foreign currency swap agreements and approved the following resolution: "The Federal Open Market Committee directs the Federal Reserve Bank of New York to extend the existing temporary reciprocal currency arrangements ("swap arrangements") for the System Open Market Account with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank through February 1, 2013. In addition, the Federal Open Market Committee authorizes the Federal Reserve Bank of New York to enter into additional swap arrangements for the System Open Market Account with the Bank of Canada, Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank to support the provision by the Federal Reserve of liquidity in Canadian dollars, British pounds, Japanese yen, euros, and Swiss francs. The swap arrangements for provision of liquidity in each of those currencies shall be subject to the same size limits, if any, currently in force for the swap arrangements for provision of liquidity in U.S. dollars to that foreign central bank. These arrangements shall terminate on February 1, 2013. Requests for drawings on the foreign currency swap lines and distribution of the proceeds to U.S. financial institutions shall be initiated by the appropriate Reserve Bank and approved by the Chairman in consultation with the Foreign Currency Subcommittee. The Foreign Currency Subcommittee will consult with the Federal Open Market Committee prior to the initial drawing on the foreign currency swap lines if possible under the circumstances then prevailing. The Chairman shall establish the rates on the swap arrangements by mutual agreement with the foreign central banks and in consultation with the Foreign Currency Subcommittee. He shall keep the Federal Open Market Committee informed, and the rates shall be consistent with principles discussed with and guidance provided by the Committee." Voting for this action:  Ben Bernanke, William C. Dudley, Elizabeth Duke, Charles L. Evans, Richard W. Fisher, Narayana Kocherlakota, Sarah Bloom Raskin, Daniel K. Tarullo, and Janet L. Yellen. Voting against this action:  Jeffrey M. Lacker. Mr. Lacker voted as alternate member for Mr. Plosser at this meeting. Mr. Lacker dissented because of his opposition to arrangements that support Federal Reserve lending in foreign currencies, which he viewed as amounting to fiscal policy. He also opposed lowering the interest rate on swap arrangements to below the primary credit rate. Notation Vote By notation vote completed on November 21, 2011, the Committee unanimously approved the minutes of the FOMC meeting held on November 1-2, 2011.   _____________________________ William B. English Secretary Return to top

2011-11-22

Minute

A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held in the offices of the Board of Governors in Washington, D.C., on Tuesday, November 1, 2011, at 10:30 a.m. and continued on Wednesday, November 2, 2011, at 8:30 a.m. PRESENT: Ben Bernanke, Chairman William C. Dudley, Vice Chairman Elizabeth Duke Charles L. Evans Richard W. Fisher Narayana Kocherlakota Charles I. Plosser Sarah Bloom Raskin Daniel K. Tarullo Janet L. Yellen Christine Cumming, Jeffrey M. Lacker, Dennis P. Lockhart, Sandra Pianalto, and John C. Williams, Alternate Members of the Federal Open Market Committee James Bullard, Esther L. George, and Eric Rosengren, Presidents of the Federal Reserve Banks of St. Louis, Kansas City, and Boston, respectively William B. English, Secretary and Economist Deborah J. Danker, Deputy Secretary Matthew M. Luecke, Assistant Secretary David W. Skidmore, Assistant Secretary Michelle A. Smith, Assistant Secretary Scott G. Alvarez, General Counsel David W. Wilcox, Economist James A. Clouse, Thomas A. Connors, Steven B. Kamin, Loretta J. Mester, Simon Potter, David Reifschneider, Harvey Rosenblum, Lawrence Slifman, Daniel G. Sullivan, and Kei-Mu Yi, Associate Economists Brian Sack, Manager, System Open Market Account Jennifer J. Johnson, Secretary of the Board, Office of the Secretary, Board of Governors Patrick M. Parkinson, Director, Division of Banking Supervision and Regulation, Board of Governors Nellie Liang, Director, Office of Financial Stability Policy and Research, Board of Governors Robert deV. Frierson, Deputy Secretary, Office of the Secretary, Board of Governors William Nelson, Deputy Director, Division of Monetary Affairs, Board of Governors Andrew T. Levin, Special Adviser to the Board, Office of Board Members, Board of Governors Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors Charles S. Struckmeyer, Deputy Staff Director, Office of the Staff Director, Board of Governors Michael P. Leahy, Senior Associate Director, Division of International Finance, Board of Governors; William Wascher, Senior Associate Director, Division of Research and Statistics, Board of Governors Ellen E. Meade, Senior Adviser, Division of Monetary Affairs, Board of Governors Daniel M. Covitz and Michael T. Kiley,1 Associate Directors, Division of Research and Statistics, Board of Governors Christopher J. Erceg,1 Deputy Associate Director, Division of International Finance, Board of Governors; Fabio M. Natalucci, Deputy Associate Director, Division of Monetary Affairs, Board of Governors Brian J. Gross,1 Special Assistant to the Board, Office of Board Members, Board of Governors David Lopez-Salido,1 Assistant Director, Division of Monetary Affairs, Board of Governors David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors Mark A. Carlson, Senior Economist, Division of Monetary Affairs, Board of Governors Penelope A. Beattie, Assistant to the Secretary, Office of the Secretary, Board of Governors Sarah G. Green, First Vice President, Federal Reserve Bank of Richmond Glenn D. Rudebusch, Executive Vice President, Federal Reserve Bank of San Francisco David Altig, Geoffrey Tootell, and Christopher J. Waller, Senior Vice Presidents, Federal Reserve Banks of Atlanta, Boston, and St. Louis, respectively Todd E. Clark, Edward S. Knotek II, and Nathaniel Wuerffel, Vice Presidents, Federal Reserve Banks of Cleveland, Kansas City, and New York, respectively Deborah L. Leonard, Assistant Vice President, Federal Reserve Bank of New York Robert L. Hetzel, Senior Economist, Federal Reserve Bank of Richmond By unanimous vote, the Committee selected David W. Wilcox to serve as Economist, and Lawrence Slifman to serve as Associate Economist, effective November 1, 2011, until the selection of their successors at the first regularly scheduled meeting of the Committee in 2012. Developments in Financial Markets and the Federal Reserve's Balance Sheet The Manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign markets during the period since the Federal Open Market Committee (FOMC) met on September 20-21, 2011. He also discussed the developments in connection with the bankruptcy filing of MF Global Holdings Ltd. and its finance subsidiary, MF Global Finance USA Inc., and with the termination of MF Global Inc. as a primary dealer. The Manager reported on System open market operations, including the ongoing reinvestment into agency-guaranteed mortgage-backed securities (MBS) of principal payments received on SOMA holdings of agency debt and agency-guaranteed MBS as well as the operations related to the maturity extension program authorized at the September 20-21 FOMC meeting. By unanimous vote, the Committee ratified the Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account over the intermeeting period. Monetary Policy Strategies and Communication The staff gave a presentation on alternative monetary policy strategies, and meeting participants discussed those alternatives as well as potential approaches for enhancing the clarity of their public communications. No decision was made at this meeting to change the Committee's policy strategy or communications. It was noted that many central banks around the world pursue an explicit inflation objective, maintain flexibility to stabilize economic activity, and seek to communicate their forecasts and policy plans as clearly as possible. Many participants pointed to the merits of specifying an explicit longer-run inflation goal, but it was noted that such a step could be misperceived as placing greater weight on price stability than on maximum employment; consequently, some suggested that a numerical inflation goal would need to be set forth within a context that clearly underscored the Committee's commitment to fostering both parts of its dual mandate. More broadly, a majority of participants agreed that it could be beneficial to formulate and publish a statement that would elucidate the Committee's policy approach, and participants generally expressed interest in providing additional information to the public about the likely future path of the target federal funds rate. The Chairman asked the subcommittee on communications to give consideration to a possible statement of the Committee's longer-run goals and policy strategy, and he also encouraged the subcommittee to explore potential approaches for incorporating information about participants' assessments of appropriate monetary policy into the Summary of Economic Projections. Committee participants shared their views regarding the potential merits and pitfalls of making conditional commitments regarding the future course of monetary policy. As noted in the staff briefing, economic theory and model simulations suggested that a policy strategy involving such commitments could foster better macroeconomic outcomes than a discretionary approach of reoptimizing policy at every meeting, so long as the public understood the central bank's strategy and believed that policymakers would follow through on those commitments. Some participants noted that conditional commitments might be particularly helpful in providing additional accommodation and mitigating downside risks when the policy rate is close to its effective lower bound, because a central bank can commit to a shallower interest rate trajectory than investors would expect if policymakers followed a purely discretionary approach. However, many pointed out that the implementation of such a strategy could pose substantial communication challenges and that the benefits would be diminished if the strategy was not fully credible. Indeed, one participant suggested that additional purchases of longer-term securities would be a clearer and more effective way to provide additional monetary accommodation when the federal funds rate was near its lower bound. Given the potential pitfalls of pursuing commitment strategies extending far out into the future, many participants thought that the Committee should consider policies intended to accrue some of the gains from conditional commitments and to perform well in a wide range of alternative scenarios. In this vein, a number of participants expressed support for the possibility of clarifying the conditionality of the Committee's forward guidance about the trajectory of the federal funds rate through setting numerical thresholds for unemployment and inflation that would warrant exceptionally low levels for the policy rate. However, several participants noted that such thresholds could be confusing in the absence of a clear expression of the Committee's longer-term goals. Moreover, others suggested that such an approach could be problematic in light of significant uncertainties about the longer-run normal rate of unemployment. One participant pointed to those uncertainties as instead supporting the use of thresholds as a way of managing potential inflation risks associated with additional accommodation. The Committee also considered policy strategies that would involve the use of an intermediate target such as nominal gross domestic product (GDP) or the price level. The staff presented model simulations that suggested that nominal GDP targeting could, in principle, be helpful in promoting a stronger economic recovery in a context of longer-run price stability. Other simulations suggested that the single-minded pursuit of a price-level target would not be very effective in fostering maximum sustainable employment; it was noted, however, that price-level targeting where the central bank maintained flexibility to stabilize economic activity over the short term could generate economic outcomes that would be more consistent with the dual mandate. More broadly, a number of participants expressed concern that switching to a new policy framework could heighten uncertainty about future monetary policy, risk unmooring longer-term inflation expectations, or fail to address risks to financial stability. Several participants observed that the efficacy of nominal GDP targeting depended crucially on some strong assumptions, including the premise that the Committee could make a credible commitment to maintaining such a strategy over a long time horizon and that policymakers would continue adhering to that strategy even in the face of a significant increase in inflation. In addition, some participants noted that such an approach would involve substantial operational hurdles, including the difficulty of specifying an appropriate target level. In light of the significant challenges associated with the adoption of such frameworks, participants agreed that it would not be advisable to make such a change under present circumstances. Staff Review of the Economic Situation The information reviewed at the November 1-2 meeting indicated that the pace of economic activity strengthened somewhat in the third quarter, reflecting in part a reversal of the temporary factors that weighed on economic growth in the first half of the year. However, labor market conditions continued to be weak. Overall consumer price inflation was more moderate than earlier in the year, as prices of energy and some commodities declined from their recent peaks. Inflation for other goods and services also appeared to have moderated, and measures of longer-run inflation expectations remained stable. Private nonfarm employment rose modestly in September, boosted in part by the return of communications workers who were on strike in August. Nonetheless, the pace of private-sector job gains in the third quarter as a whole was less than it was in the first half of the year. Meanwhile, employment in the state and local government sector continued to trend lower. The unemployment rate held at 9.1 percent in September, and both long-duration unemployment and the share of workers employed part time for economic reasons were still high. Initial claims for unemployment insurance have edged down since the middle of September but have remained at a level consistent with only modest employment growth, and most indicators of businesses' hiring plans have showed no improvement. Industrial production rose modestly in September, and the manufacturing capacity utilization rate edged up. Output in the motor vehicle--related sectors continued to step up following the disruptions associated with the earthquake in Japan earlier in the year, but the pace of factory production outside of those sectors was sluggish. Motor vehicle assemblies were scheduled to rise further in the fourth quarter, but broader indicators of near-term manufacturing activity, such as the diffusion indexes of new orders from the national and regional manufacturing surveys, remained at levels consistent with only modest increases in production in the coming months. Real personal consumption expenditures (PCE) rose briskly in September but posted a more moderate gain for the third quarter as a whole. Motor vehicle purchases increased significantly in September to a level well above that in the spring (when availability of some models was limited by supply chain disruptions), and sales of new light motor vehicles stepped up further in October. However, real disposable income declined in the third quarter, as increases in consumer prices more than offset small gains in nominal income. Moreover, consumer sentiment continued to be downbeat in October. Housing market activity remained very weak, held down by the large overhang of foreclosed and distressed properties along with limited demand in an environment of uncertainty about future home prices and tight underwriting standards for mortgage loans. Although starts and permits for new single-family homes edged up in September, they stayed near the depressed levels seen since the middle of last year. Sales of new and existing homes continued to be soft in recent months, and home prices trended lower. Real business purchases of equipment and software expanded appreciably in the third quarter. Moreover, new orders for nondefense capital goods continued to run ahead of shipments in August and September; the buildup of unfilled orders pointed toward further increases in spending for business equipment in subsequent months. Nevertheless, survey measures of business conditions and sentiment in October suggested that firms remained cautious. Real business expenditures for nonresidential construction also rose appreciably in the third quarter, but spending was still at a relatively low level and continued to be held back by elevated vacancy rates and tight credit conditions for construction loans. In the third quarter, businesses increased their inventories at a much slower pace than in the second quarter, and inventory-to-sales ratios in most industries appeared to be in a comfortable range. Real federal purchases increased in the third quarter, as defense expenditures continued to rise from unusually low levels early in the year, more than offsetting a decrease in nondefense spending. At the state and local level, real purchases declined in the third quarter at a noticeably slower rate than in the first half of the year as the pace of reductions in payrolls eased and construction spending rose slightly. The U.S. international trade deficit was virtually the same in August as it was in July, as both exports and imports moved down only by small amounts. The decrease in exports reflected lower sales of automotive products and capital goods, which more than offset increases in exports of industrial supplies and consumer goods. The dip in imports was the result of lower purchases of capital goods, automotive products, and consumer goods, which outweighed an increase in petroleum imports. The advance release of the third-quarter data for the national income and product accounts showed real exports of goods and services expanding faster than real imports. As a result, net exports were estimated to have made a small positive contribution to real GDP growth in the third quarter, a contribution of about the same size as in the second quarter. Overall U.S. consumer price inflation, as measured by the PCE price index, was more moderate in the third quarter than in the first half of the year. Consumer prices for food and energy increased last quarter at a slower pace than earlier in the year, and consumer prices excluding food and energy rose a bit less than in the preceding quarter. Near-term inflation expectations from the Thomson Reuters/University of Michigan Surveys of Consumers in October continued to be well below the elevated level seen in the spring, and longer-term inflation expectations in the survey remained stable. Measures of labor compensation showed that wage increases continued to be subdued. The employment cost index increased at a modest rate over the year ending in the third quarter, and compensation per hour in the nonfarm business sector appeared to have decalerated somewhat last quarter. Similarly, the 12-month change in average hourly earnings for all employees remained subdued in September. Foreign economic activity appeared to have largely recovered from the effects of the Japanese disaster in March, as production in Japan rebounded and supply disruptions waned. However, recent data pointed to considerable weakness in the euro-area economy. Elsewhere, indicators were somewhat more upbeat, with employment in Canada continuing to rise through September, while GDP growth in China over the year ending in the third quarter was a little less than in the first half of the year but still quite robust. Foreign inflation remained contained, although the reversal of earlier increases in energy prices appeared to be passing through to consumer price inflation relatively slowly in some countries. Staff Review of the Financial Situation Financial markets were quite volatile over the period since the September FOMC meeting. Investor sentiment was strongly influenced by prospects for Europe, as market participants remained highly attuned to developments regarding possible steps to contain the fiscal and banking problems there. Economic data releases that were, on balance, somewhat better than market participants expected provided some support to financial markets. Longer-term Treasury yields declined appreciably following the release of the September FOMC statement. Investors reportedly viewed the Committee's assessment of the economic outlook as more downbeat than anticipated. In addition, the announcement that the Federal Reserve would lengthen the average maturity of its portfolio by purchasing longer-term Treasury securities and selling an equivalent amount of shorter-term Treasury securities reportedly contributed to the decline in longer-term yields on the day. Yields on current-coupon agency MBS also moved lower on the announcement that the Federal Reserve would begin to reinvest principal payments on agency securities in agency MBS. Over the following weeks, movements in yields were driven by shifts in investors' assessments of the ongoing efforts to address the European fiscal and banking situation and by somewhat stronger-than-expected U.S. economic data. On balance since the September FOMC meeting, Treasury yields on shorter-dated securities and the expected path of the federal funds rate implied by money market futures quotes were not much changed. Yields on Treasury securities with maturities beyond 10 years moved down. Measures of near-term inflation compensation derived from nominal and inflation-protected Treasury securities rose slightly over the intermeeting period, while similar measures of longer-term inflation compensation were about unchanged. Credit default swap (CDS) spreads and equity prices of large U.S. banking organizations were again volatile over the period. Investor sentiment toward these financial institutions was strongly influenced by changes in investors' assessments of the risks associated with the European fiscal and banking problems and the exposure of various financial institutions to Europe. Third-quarter U.S. bank earnings reports generally met investors' expectations. On net, equity prices for U.S. banking firms were not much changed over the period since the last FOMC meeting, while their CDS spreads were a bit higher. European bank CDS spreads remained elevated, and these institutions continued to face somewhat strained conditions in short-term bank funding markets. Although equity markets were volatile, broad U.S. equity price indexes ended the intermeeting period little changed. Earnings reports for nonfinancial firms generally came in somewhat better than investors expected and about in line with second-quarter levels. Gross public equity issuance by nonfinancial firms continued to be very weak in September and October, with a large number of firms shelving planned initial public offerings amid the volatility in equity markets. Yields on investment- and speculative-grade corporate bonds edged lower, on net, over the period, leaving their spreads to Treasury securities slightly narrower. Credit flows for nonfinancial firms were mixed in September and October. The pace of bond financing by investment-grade nonfinancial corporations slowed some in October from its robust September pace, while bond issuance by speculative-grade firms was limited. Nonfinancial commercial paper outstanding posted solid growth in October. In the leveraged loan market, issuance financed by institutional investors slowed significantly in the third quarter. Financing conditions for commercial real estate (CRE) markets appeared to have deteriorated in some respects. Issuance of commercial mortgage-backed securities (CMBS) slowed further in the third quarter amid widening CMBS spreads, and only a small number of deals were in the pipeline for the rest of the year. Prices of most types of commercial properties remained depressed, and aggregate vacancy and delinquency rates for commercial properties were close to their recent highs. Interest rates on residential mortgages changed little, on net, over the intermeeting period but remained at historically low levels. The recent low rates appeared to have only a modest effect on the pace of mortgage refinancing, as tight underwriting standards and low home equity continued to limit the access of many households to the mortgage market. However, in October, the Federal Housing Finance Agency announced changes to the Home Affordable Refinance Program to expand eligibility and take-up among borrowers with mortgages backed by Fannie Mae and Freddie Mac. Indicators of home prices remained weak, reflecting a large inventory of unsold properties and modest demand for homes. The pace at which performing prime mortgages became newly delinquent rose over the summer but remained below last year's levels. Consumer credit decreased in August. Growth in nonrevolving credit, which had been volatile due to a shift in the timing of student loan originations, stepped down from the pace seen earlier in the year but remained solid in recent months. Issuance of consumer credit asset-backed securities continued at a moderate pace through mid-October. Delinquency rates for several categories of consumer loans remained low, a reflection in part of tighter underwriting standards that shifted the composition of borrowers toward those with stronger credit histories. Core commercial bank loans expanded slightly in the third quarter. Commercial and industrial (C&I) loans accelerated following the already strong increases seen over the first half of the year. That growth was concentrated among large domestic banks and non-European foreign institutions. Consumer loans on banks' books advanced modestly in the third quarter, ending a two-year string of quarterly declines. Closed-end residential mortgage loans held by banks also increased amid the modest pickup in refinancing activity, while CRE loans contracted. The October Senior Loan Officer Opinion Survey on Bank Lending Practices showed less net easing of lending standards by domestic banks than in the past few surveys. In particular, domestic banks reported little change in their standards on C&I loans over the third quarter, on net, compared with more widespread reports of easing in the previous several quarters. Demand for loans reportedly was little changed, on balance, over the third quarter. M2 grew at a modest pace in September and October, well below the rapid rate seen in July and August. Some of the factors that contributed to M2 growth over the summer, such as concerns about European financial developments and equity market volatility, persisted and supported elevated levels of M2 deposits but did not trigger additional sizable inflows. The monetary base also grew moderately as its major components--reserve balances and currency--increased over the period. Foreign financial markets remained volatile over the intermeeting period, and funding pressures for many European financial institutions continued. After falling sharply in August and early September, foreign equity prices rose, with stocks in the euro area outperforming those in most other economies. For most of the period, market participants seemed heartened by European leaders' efforts to address the fiscal and financial challenges present in the euro area, although the news late in the period on a possible Greek referendum sent stock prices down sharply. Benchmark sovereign yields increased over the period, but spreads of yields on 10-year sovereign bonds of the most vulnerable euro-area countries over yields on German bunds were little changed on net. Some reversal of safe-haven flows in October reportedly led the dollar to give back most of the gains it registered in late September, leaving the broad nominal foreign exchange value of the dollar little changed, on balance, relative to its level at the time of the September FOMC meeting. At the end of October, Japanese officials intervened in foreign exchange markets through sales of yen. The first round of the three-month U.S. dollar auctions that major foreign central banks announced on September 15 was held in October; demand was quite limited, and only the European Central Bank (ECB) drew on its swap line with the Federal Reserve. Korea and Japan announced that they would increase the size and scope of their bilateral currency swap arrangements, expanding the size of their existing won--yen swap arrangement and establishing a $30 billion facility in which dollars could be swapped for either won or yen. A number of central banks announced additional measures to stimulate economic activity. The Bank of England and Bank of Japan each announced expansions of their respective asset purchase programs, and the ECB announced that it would conduct two refinancing operations with maturities of slightly more than a year and launched a new covered bond purchase program. The central banks of Brazil, Indonesia, and Israel lowered their policy rates, citing a potential slowdown in global growth. Staff Economic Outlook With the recent data on spending, particularly for consumer expenditures and business outlays for capital goods and nonresidential construction, stronger than the staff anticipated at the time of the September FOMC meeting, the staff's near-term projection for the rate of increase in real GDP was revised up. However, other important near-term indicators of economic activity remained downbeat: Measures of consumer sentiment were still very low, business surveys pointed to continued caution by firms, conditions in the labor market remained weak, and gains in manufacturing production outside of the motor vehicle--related sectors were sluggish. Moreover, many of the factors that have been restraining the recovery, such as the large overhang of vacant houses, tight credit conditions, and elevated risk premiums, remained in place. Consequently, the staff's outlook for economic activity over the medium term was similar to the projection prepared for the September FOMC meeting. The staff continued to project that real GDP would accelerate gradually in 2012 and 2013, supported by accommodative monetary policy, further improvements in credit conditions, and a pickup in consumer and business sentiment from their current low levels. Over the forecast period, the increase in real GDP was projected to be sufficient to reduce the slack in product and labor markets only slowly, and the unemployment rate was expected to remain elevated at the end of 2013. The staff's forecast for inflation was essentially unchanged from the projection prepared for the September FOMC meeting. The upward pressure on consumer prices from the rise in commodity and import prices early in the year was anticipated to ease further in the current quarter. With longer-run inflation expectations stable and significant slack anticipated to persist in labor and product markets, the staff continued to expect prices to rise at a subdued pace in 2012 and 2013. Participants' Views on Current Conditions and the Economic Outlook In conjunction with this FOMC meeting, all participants--the five members of the Board of Governors and the presidents of the 12 Federal Reserve Banks--provided projections of output growth, the unemployment rate, and inflation for each year from 2011 through 2014 and over the longer run. Longer-run projections represent each participant's assessment of the rate to which each variable would be expected to converge, over time, under appropriate monetary policy and in the absence of further shocks to the economy. Although participants had revised downward their projections for growth since their previous forecasts in June, they continued to anticipate that economic growth would pick up and the unemployment rate would decline gradually through 2014. They also continued to project that inflation would settle at or below levels consistent with the Committee's dual mandate. Participants' forecasts are described in more detail in the Summary of Economic Projections, which is attached as an addendum to these minutes. In their discussion of the economic situation and outlook, meeting participants regarded the information received during the intermeeting period as indicating that economic growth had strengthened somewhat in the third quarter, reflecting in part a reversal of temporary factors that had weighed on the economic recovery in the first half of the year. Participants noted that global supply chain disruptions associated with the natural disaster in Japan had diminished, and that the prices of energy and some commodities had come down from their recent peaks, easing strains on household budgets and likely contributing to a somewhat stronger pace of consumer spending in recent months. More broadly, final demand from consumers and businesses was stronger than had been expected at the time of the September FOMC meeting. Nonetheless, most participants anticipated that the pace of economic growth would remain moderate over coming quarters. While they believed that the economic recovery would continue to be supported by accommodative monetary policy, ongoing improvements in households' and businesses' financial positions, and pent-up demand for goods and services, a number of factors were seen as likely to continue to restrain the pace of economic growth. Those included persistent weakness in the labor and housing markets, still-tight credit conditions for many households and small businesses, low consumer and business confidence, fiscal consolidation at all levels of government, and elevated volatility in financial markets. Moreover, the recovery was still subject to significant downside risks, including strains in global financial markets. With longer-term inflation expectations remaining stable, the effects of earlier increases in the prices of energy and other commodities continuing to wane, and low levels of resource utilization restraining increases in prices and wages, most participants anticipated that inflation would settle, over coming quarters, at or below levels they judged to be most consistent with their dual mandate. In the household sector, incoming data on retail sales were somewhat stronger than expected, and participants reported scattered optimism among their contacts regarding the prospects for holiday spending. Some participants thought that the effects of balance sheet deleveraging might be running their course or that such effects could be less powerful than had been thought. Others noted that the recent pickup in consumer spending outpaced growth in after-tax incomes and was accompanied by a decline in the saving rate, raising doubts about its sustainability unless income growth picked up. In addition, households appeared to remain pessimistic about the prospects for their future income, the job market was still weak, consumer confidence was historically very low, and credit conditions for many households were still tight. The housing sector continued to be depressed, and some meeting participants indicated that the elevated supply of available homes and the overhang of foreclosures, together with limited access to mortgage credit, were continuing to put downward pressure on house prices and housing construction. A few participants noted that recent government initiatives aimed at helping high-loan-to-value borrowers refinance could be useful steps toward stabilizing the housing market. Business contacts in many parts of the country were reported to be cautious and uncertain about the economic and political outlook and so remained reluctant to hire or expand capacity. However, production in the manufacturing, agriculture, and energy sectors continued to increase, and the auto sector was rebounding from earlier supply chain disruptions. In addition, businesses in a number of regions reported ongoing capital investment to increase productivity. Input cost pressures were said to have abated somewhat, while labor costs remained subdued. Overall, credit costs were low, and profits and balance sheets at nonfinancial corporations were healthy, with many firms continuing to hold very high levels of cash. Despite some signs of improvement of late, the available indicators pointed to continued weakness in overall labor market conditions, and the unemployment rate remained elevated. Some participants suggested that the persistently high level of unemployment reflected the impact of structural factors, including mismatches between the skills of the unemployed and the skills demanded in sectors in which jobs were currently available. Consistent with this view, some business contacts reportedly were concerned about the low quality of many job applicants, while other contacts noted that workers with some specialized skills continued to be in short supply. However, other participants indicated that such concerns were not new and that much of the current elevated level of unemployment reflected cyclical factors, with one pointing to the lack of wage pressures as evidence. As a result, they expected that unemployment would fall back as the economy recovered. Some participants again warned that the exceptionally high level of long-term unemployment could ultimately lead to permanent negative effects on the skills and employment prospects of the unemployed. Meeting participants observed that financial markets continued to be particularly volatile during the intermeeting period as investors responded to incoming economic data and to news regarding fiscal and financial developments in Europe. Liquidity in many markets worsened, in part because financial institutions more reliant on short-term funding markets reportedly pulled back from risk-taking and became somewhat less willing to make markets. Participants noted the announcement by European policymakers of a new package of measures to address Greece's fiscal situation as well as the vulnerabilities of European banks and sovereigns. However, participants indicated that many details of the new plan had not yet been worked out and that a number of important issues remained unresolved. Participants took note of the possible adverse effects on U.S. financial markets and the broader U.S. economy if European sovereign debt and banking problems intensified. Participants observed, however, that the capital and liquidity positions of U.S. banks had strengthened in recent quarters and that the credit quality of loans to businesses and households had improved further. Contacts in the banking sector reported that U.S. banks continued to be willing to extend loans to creditworthy borrowers, but loan demand remained weak and competition for such borrowers was putting pressure on net interest margins. It was noted that very low interest rates were negatively affecting pension funds and the profitability of the life insurance industry. Participants also discussed the events surrounding the bankruptcy filing of MF Global Holdings Ltd. and saw the financial stability implications of this development as limited to date. Participants generally agreed that measures of total inflation appeared to have moderated since earlier in the year as prices of energy and some commodities declined from their peaks. Measures of core inflation also seemed to have declined in recent months, and longer-term inflation expectations remained well anchored. Nonetheless, some participants noted that core inflation had not come down as quickly or by as much as they had expected in light of the reduction in commodity prices, perhaps suggesting that the level of potential output was lower than had been thought. However, other participants pointed to the subdued pace of gains in labor costs as a factor damping inflation, and reports from contacts suggested that upward pressure on wages remained limited. Regarding their overall outlook for economic activity, participants generally agreed that, even with the positive news received over the intermeeting period, the most probable outcome was a moderate pace of economic growth over the medium run with only a gradual decline in the unemployment rate. While some factors were seen as likely to support growth going forward--such as pent-up demand, improvements in household and business balance sheets, and accommodative monetary policy--participants observed that the pace of economic recovery would likely continue to be held down for some time by persistent headwinds. In particular, they pointed to very low levels of consumer and business confidence, further efforts by households to deleverage, cutbacks at all levels of government, elevated financial market volatility, still-tight credit conditions for some households and small businesses, and the ongoing weakness in the labor and housing markets. While recent incoming data suggested reduced odds that the economy would slide back into recession, participants still saw significant downside risks to the outlook for economic growth. Risks included potential spillovers to U.S. financial markets and institutions, and so to the broader U.S. economy, if the European debt and banking crisis were to worsen significantly. In addition, participants noted the risk of a larger-than-expected fiscal tightening and the possibility that structural problems in the housing market had attenuated the transmission of monetary policy actions to the real economy. It was also noted that the extended period of highly accommodative monetary policy could eventually lead to a buildup of financial imbalances. A few participants, however, mentioned the possibility that economic growth could be more rapid than currently expected, particularly if gains in output and employment led to a virtuous cycle of improvements in household balance sheets, increased confidence, and easier credit conditions. With respect to the outlook for inflation, participants generally anticipated that inflation would recede further over coming quarters and would settle over the medium run at levels at or below those judged to be most consistent with the Committee's dual mandate. They pointed to the further dissipation of the effects of earlier increases in the prices of energy and some commodities, the significant slack in resource utilization, the continued subdued growth in labor compensation, and well-anchored inflation expectations as factors likely to contribute to the moderation in inflation over time. A number of participants saw the risks to the outlook for inflation as roughly balanced. A few participants felt that the continuation of the current stance of monetary policy, coupled with the possibility of a rebound in energy and commodity prices, posed some upside risks to inflation. Other participants instead saw inflation risks as tilted to the downside, in light of their expectations for persistent resource slack. It was noted that U.S. inflation had been influenced relatively more by commodity price fluctuations in recent years; because commodity prices reflect global economic conditions, U.S. inflation might be less affected by domestic factors and more linked to the global outlook than in the past. Committee Policy Action Members noted that information received over the intermeeting period pointed to somewhat stronger economic growth in the third quarter, partly reflecting a reversal of temporary factors that had depressed economic growth in the first half of the year. However, overall labor market conditions remained weak. Members generally anticipated that unemployment would decline only gradually from levels significantly above those that the Committee would expect to prevail in the longer run, with inflation likely to settle at levels at or below those consistent with the Committee's dual mandate. Accordingly, in the discussion of monetary policy for the period ahead, all Committee members agreed to continue the program of extending the average maturity of the Federal Reserve's holdings of securities as announced in September. The Committee decided to maintain its existing policy of reinvesting principal payments from its holdings of agency debt and agency MBS in agency MBS and of rolling over maturing Treasury securities at auction. In addition, the Committee agreed to keep the target range for the federal funds rate at 0 to 1/4 percent and to reiterate its expectation that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. A few members expressed interest in using language specifying a period of time during which the federal funds rate was expected to remain exceptionally low, rather than a calendar date, arguing that such language might be better to indicate a constant stance of monetary policy over time. However, members generally preferred to retain the existing forward guidance, at least for now. A few members indicated that they believed the economic outlook might warrant additional policy accommodation. However, it was noted that any such accommodation would likely be more effective if it were provided in the context of a future communications initiative, and most of these members agreed that they could support retention of the current policy stance at this meeting. One member dissented from the policy decision on the grounds that additional monetary policy accommodation was warranted at this time. With the Committee in the process of reviewing its monetary policy strategies and communication, and no additional accommodation being provided at this meeting, a few members indicated that they could support the Committee's decision even though they had not favored recent policy actions. The Committee reiterated that it will regularly review the size and composition of its securities holdings and that it is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in the context of price stability. With respect to the statement to be released following the meeting, members agreed that only relatively small changes were needed to reflect the modest improvement in the economic outlook and to note that the Committee would continue to implement its policy steps from recent meetings. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to continue the maturity extension program it began in September to purchase, by the end of June 2012, Treasury securities with remaining maturities of approximately 6 years to 30 years with a total face value of $400 billion, and to sell Treasury securities with remaining maturities of 3 years or less with a total face value of $400 billion. The Committee also directs the Desk to maintain its existing policies of rolling over maturing Treasury securities into new issues and of reinvesting principal payments on all agency debt and agency mortgage-backed securities in the System Open Market Account in agency mortgage-backed securities in order to maintain the total face value of domestic securities at approximately $2.6 trillion. The Committee directs the Desk to engage in dollar roll transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability." The vote encompassed approval of the statement below to be released at 12:30 p.m.: "Information received since the Federal Open Market Committee met in September indicates that economic growth strengthened somewhat in the third quarter, reflecting in part a reversal of the temporary factors that had weighed on growth earlier in the year. Nonetheless, recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated. Household spending has increased at a somewhat faster pace in recent months. Business investment in equipment and software has continued to expand, but investment in nonresidential structures is still weak, and the housing sector remains depressed. Inflation appears to have moderated since earlier in the year as prices of energy and some commodities have declined from their peaks. Longer-term inflation expectations have remained stable. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect a moderate pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, there are significant downside risks to the economic outlook, including strains in global financial markets. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate further. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations. To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate. The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools to promote a stronger economic recovery in a context of price stability." Voting for this action: Ben Bernanke, William C. Dudley, Elizabeth Duke, Richard W. Fisher, Narayana Kocherlakota, Charles I. Plosser, Sarah Bloom Raskin, Daniel K. Tarullo, and Janet L. Yellen. Voting against this action: Charles L. Evans. Mr. Evans dissented because he saw the high unemployment rate and the outlook for only weak economic growth as calling for additional policy accommodation at this meeting. Moreover, the longer the current situation of low resource utilization lasted, the more the economy's longer-term growth potential could be impaired. Furthermore, given current policy, his outlook was for inflation to come in below levels consistent with the Committee's dual mandate, bolstering the case for additional monetary easing at this time. He also believed policies with more-explicit forward guidance about the economic conditions under which exceptionally low levels of the funds rate could be maintained would improve the prospects for growth and employment and, while possibly admitting somewhat higher inflation for a time, would still safeguard price stability. It was agreed that the next meeting of the Committee would be held on Tuesday, December 13, 2011. The meeting adjourned at 10:30 a.m. on November 2, 2011. Notation Vote By notation vote completed on October 11, 2011, the Committee unanimously approved the minutes of the FOMC meeting held on September 20-21, 2011.   _____________________________ William B. English Secretary   1. Attended the portion of the meeting relating to monetary policy strategies and communication. Return to text Return to top

2011-11-02

Statement

Information received since the Federal Open Market Committee met in September indicates that economic growth strengthened somewhat in the third quarter, reflecting in part a reversal of the temporary factors that had weighed on growth earlier in the year. Nonetheless, recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated. Household spending has increased at a somewhat faster pace in recent months. Business investment in equipment and software has continued to expand, but investment in nonresidential structures is still weak, and the housing sector remains depressed. Inflation appears to have moderated since earlier in the year as prices of energy and some commodities have declined from their peaks. Longer-term inflation expectations have remained stable. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect a moderate pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, there are significant downside risks to the economic outlook, including strains in global financial markets. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate further. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations. To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate. The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools to promote a stronger economic recovery in a context of price stability. Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Richard W. Fisher; Narayana Kocherlakota; Charles I. Plosser; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was Charles L. Evans, who supported additional policy accommodation at this time.

2011-10-12

Minute

A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held in the offices of the Board of Governors in Washington, D.C., on Tuesday, September 20, 2011, at 10:30 a.m., and continued on Wednesday, September 21, 2011, at 9:00 a.m. PRESENT: Ben Bernanke, Chairman William C. Dudley, Vice Chairman Elizabeth Duke Charles L. Evans Richard W. Fisher Narayana Kocherlakota Charles I. Plosser Sarah Bloom Raskin Daniel K. Tarullo Janet L. Yellen Christine Cumming, Jeffrey M. Lacker, Dennis P. Lockhart, Sandra Pianalto, and John C. Williams, Alternate Members of the Federal Open Market Committee James Bullard and Eric Rosengren, Presidents of the Federal Reserve Banks of St. Louis and Boston, respectively Esther L. George, First Vice President, Federal Reserve Bank of Kansas City William B. English, Secretary and Economist Deborah J. Danker, Deputy Secretary Matthew M. Luecke, Assistant Secretary David W. Skidmore, Assistant Secretary Michelle A. Smith, Assistant Secretary Scott G. Alvarez, General Counsel Thomas C. Baxter, Deputy General Counsel James A. Clouse, Thomas A. Connors, Steven B. Kamin, Loretta J. Mester, Simon Potter, David Reifschneider, Harvey Rosenblum, and David W. Wilcox, Associate Economists Brian Sack, Manager, System Open Market Account Jennifer J. Johnson, Secretary of the Board, Office of the Secretary, Board of Governors Patrick M. Parkinson, Director, Division of Banking Supervision and Regulation, Board of Governors Nellie Liang, Director, Office of Financial Stability Policy and Research, Board of Governors Robert deV. Frierson, Deputy Secretary, Office of the Secretary, Board of Governors William Nelson, Deputy Director, Division of Monetary Affairs, Board of Governors Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors Charles S. Struckmeyer, Deputy Staff Director, Office of the Staff Director, Board of Governors Seth B. Carpenter, Senior Associate Director, Division of Monetary Affairs, Board of Governors; Michael P. Leahy, Senior Associate Director, Division of International Finance, Board of Governors; Lawrence Slifman and William Wascher, Senior Associate Directors, Division of Research and Statistics, Board of Governors Andrew T. Levin, Senior Adviser, Office of Board Members, Board of Governors; Stephen A. Meyer and Joyce K. Zickler, Senior Advisers, Division of Monetary Affairs, Board of Governors Daniel M. Covitz and David E. Lebow, Associate Directors, Division of Research and Statistics, Board of Governors David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors Penelope A. Beattie, Assistant to the Secretary, Office of the Secretary, Board of Governors James M. Lyon, First Vice President, Federal Reserve Bank of Minneapolis Jeff Fuhrer, Executive Vice President, Federal Reserve Bank of Boston David Altig, Alan D. Barkema, Spencer Krane, Mark E. Schweitzer, Christopher J. Waller, and John A. Weinberg, Senior Vice Presidents, Federal Reserve Banks of Atlanta, Kansas City, Chicago, Cleveland, St. Louis, and Richmond, respectively Julie Ann Remache, Assistant Vice President, Federal Reserve Bank of New York Eric T. Swanson, Senior Research Advisor, Federal Reserve Bank of San Francisco Jonathan Heathcote, Senior Economist, Federal Reserve Bank of Minneapolis Developments in Financial Markets and the Federal Reserve's Balance Sheet The Manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets during the period since the Federal Open Market Committee (FOMC) met on August 9, 2011. He also reported on System open market operations, including the continuing reinvestment into longer-term Treasury securities of principal payments received on SOMA holdings of agency debt and agency-guaranteed mortgage-backed securities (MBS). By unanimous vote, the Committee ratified the Desk's domestic transactions over the intermeeting period. Staff Presentation on Policy Tools The staff gave a presentation on several tools that could be used, within the Committee's current policy framework, to provide additional monetary policy accommodation to support the economic recovery. The presentation first reviewed three options for managing the size and composition of the SOMA portfolio: a reinvestment maturity extension program, a SOMA portfolio maturity extension program, and a large-scale asset purchase program. Under the first of these options, the Federal Reserve would reinvest the principal payments it receives on its holdings of agency securities exclusively in long-term Treasury securities. Under the second option, the Committee would purchase long-term Treasury securities and sell the same amount of shorter-term Treasury securities; these transactions would significantly increase the average maturity of the SOMA portfolio, but the size of the Federal Reserve's balance sheet and the level of reserve balances would be largely unaffected in the near term. Under the third option, the Committee would purchase longer-term Treasury securities, increasing the size of its balance sheet and the supply of reserve balances. The staff also summarized a set of options for clarifying, for the public, the Committee's longer-run objectives under its dual mandate as well as the Committee's forward guidance about the likely future stance of monetary policy. The options focused on ways to elucidate the economic conditions that could warrant raising the level of short-term interest rates. Finally, the staff presentation summarized the potential implications of reducing the interest rate that the Federal Reserve pays on reserve balances that depository institutions hold in accounts at the Federal Reserve Banks (the IOR rate). Meeting participants expressed a range of views on the potential efficacy of policy tools tied to the size and composition of the Federal Reserve's balance sheet. Many judged that these policies could provide additional monetary policy accommodation by lowering longer-term interest rates and easing financial conditions at a time when further reductions in the federal funds rate are infeasible. However, a number saw the potential effects on real economic activity as limited or only transitory, particularly in the current environment of balance sheet deleveraging, credit constraints, and household and business uncertainty about the economic outlook. Participants noted that a SOMA maturity extension program would not expand the Federal Reserve's balance sheet or the level of reserve balances, and that the scale of such a program was necessarily limited by the size of the Federal Reserve's holdings of shorter-term securities so that it could not be repeated to provide further stimulus. A number of participants saw large-scale asset purchases as potentially a more potent tool that should be retained as an option in the event that further policy action to support a stronger economic recovery was warranted. Some judged that large-scale asset purchases and the resulting expansion of the Federal Reserve's balance sheet would be more likely to raise inflation and inflation expectations than to stimulate economic activity and argued that such tools should be reserved for circumstances in which the risk of deflation was elevated. In commenting on the implications of a maturity extension program or another large-scale asset purchase program, several participants noted that the System should avoid holding a very large proportion of the outstanding stock of longer-term Treasury securities in its portfolio because the result could be a deterioration in market functioning. A number of participants suggested directing some purchases or reinvestments into agency MBS; however, a couple of participants saw such actions as unlikely to have benefits, or as a form of credit allocation. Most participants indicated that they favored taking steps to increase further the transparency of monetary policy, including providing more information about the Committee's longer-run policy objectives and about the factors that influence the Committee's policy decisions. Participants generally agreed that a clear statement of the Committee's longer-run policy objectives could be helpful; some noted that it would also be useful to clarify the linkage between these longer-run objectives and the Committee's approach to setting the stance of monetary policy in the short and medium run. That said, a number of participants expressed concerns about the conceptual issues associated with establishing and communicating explicit longer-run objectives for the unemployment rate or other measures of labor market conditions, inasmuch as the long-run equilibrium levels of such measures are influenced importantly by nonmonetary factors, are subject to change over time, and are estimated with considerable uncertainty. In contrast, participants noted that the long-run level of inflation is determined primarily by monetary policy. Accordingly, many felt that if the Committee were to reach a consensus on more explicit statements of its longer-run objectives, it would need to provide an in-depth explanation to the public of how those objectives were determined and how they fit into the policymaking framework. Participants generally saw the Committee's post-meeting statements as not well suited to communicate fully the Committee's thinking about its objectives and its policy framework, and agreed that the Committee would need to use other means to communicate that information or to supplement information in the statement. Most participants also indicated that they saw advantages in being more transparent about the conditionality in the Committee's forward guidance by providing more information about the economic conditions to which the guidance refers. They judged that such a step could make the Committee's forward guidance more effective and increase the likelihood that financial markets would respond to incoming economic information in ways that would help monetary policy achieve its goals. However, several participants saw a risk that any explicit statement of economic conditions specified in the Committee's forward guidance could be mistaken for a statement of its longer-run objectives. Others thought this risk of misinterpretation could be managed through careful communications. A number of participants suggested that the Committee's periodic Summary of Economic Projections could be used to provide more information about their views on the longer-run objectives and the likely evolution of monetary policy. Participants discussed whether to reduce the IOR rate, weighing potential benefits and costs. A number of participants judged that a reduction would result in at least marginally lower money market rates and could help stimulate bank lending. Several noted that reducing the IOR rate could help signal the Committee's intention to keep the federal funds rate low. Some participants observed that keeping the IOR rate noticeably above the market rate on other safe, short-term instruments could be perceived as subsidizing some banking institutions. However, some others noted that a recent change in deposit insurance assessments had the effect of significantly reducing the net return that many banks receive from holding reserve balances. Moreover, many participants voiced concerns that reducing the IOR rate risked costly disruptions to money markets and to the intermediation of credit, and that the magnitude of such effects would be difficult to predict in advance. In addition, the federal funds market could contract as a result and the effective federal funds rate could become less reliably linked to other short-term interest rates. Participants generally agreed that they needed more information on the likely effects of a reduction in the IOR rate in order to judge its usefulness as a policy tool in the current environment. Staff Review of the Economic Situation The information reviewed at the September 20-21 meeting indicated that economic activity continued to expand at a slow pace and that labor market conditions remained weak. Consumer price inflation appeared to have moderated since earlier in the year, and measures of long-run inflation expectations remained stable. Private nonfarm employment rose only slightly in August, and job gains were weak even after adjusting for the effects of a strike by communications workers during the month. Meanwhile, employment at state and local governments declined further, reflecting their tight budget conditions. The unemployment rate remained at 9.1 percent in August, and both long-duration unemployment and the share of workers employed part time for economic reasons were still elevated. Initial claims for unemployment insurance edged up, on net, over the previous few weeks, and many indicators of firms' hiring plans deteriorated somewhat in recent months. Industrial production expanded solidly but unevenly in July and August, and the manufacturing capacity utilization rate moved up. Output increased markedly at both motor vehicle manufacturers and their upstream suppliers as the supply chain disruptions associated with the earthquake in Japan eased. In contrast, the pace of factory production softened among industries unlikely to have been affected by the supply disruptions. Motor vehicle assemblies were scheduled to rise noticeably in September and then increase further in the fourth quarter, but broader indicators of near-term manufacturing activity, such as the diffusion indexes of new orders from the national and regional manufacturing surveys, remained at levels consistent with only meager gains in output in the coming months. Real consumer spending posted a solid gain in July, in part reflecting a rebound in motor vehicle purchases from their low level in the spring when the availability of some models was limited. However, nominal retail sales, excluding purchases at motor vehicles and parts outlets, only inched up in August, and sales of new light motor vehicles ticked down. Real disposable income edged lower in July, as gains in nominal income were offset by the rise in consumer prices. Consumer sentiment deteriorated significantly further in August and stayed downbeat in early September. Activity in the housing market continued to be depressed by weak demand, uncertainty about future home prices, tight credit conditions for mortgages and construction loans, and a substantial inventory of foreclosed and distressed properties. Starts and permits for new single-family homes in July and August stayed near the very low levels seen since the middle of last year. Sales of new and existing homes remained subdued in recent months, and home prices edged down further. Real business spending on equipment and software appeared to expand further. Nominal shipments of nondefense capital goods increased in July, and business purchases of new motor vehicles trended higher. New orders of nondefense capital goods continued to run ahead of shipments in July, and the expanding backlog of unfilled orders pointed toward further gains in outlays for business equipment in subsequent months. In contrast, survey measures of business conditions and sentiment remained at muted levels in August and September. Real business expenditures for office and commercial buildings moved up in recent months, but outlays were still at a very low level and continued to be restrained by high vacancy rates and tight credit conditions for construction loans. Meanwhile, spending for drilling and mining structures increased further. Businesses seemed to be adding to inventories at a more modest pace in July, as the re-stocking of motor vehicle inventories depleted by the earlier production disruptions was offset by slowing accumulation in other sectors. In most industries, inventories looked to be reasonably well aligned with sales. Real federal government purchases appeared to increase in recent months as defense expenditures continued to rise from unusually low levels early in the year. At the state and local level, real government purchases seemed set to decline further as payrolls were reduced and construction spending decreased. The nominal U.S. international trade deficit widened in June but narrowed significantly in July. Exports rose briskly in July, particularly in industrial supplies and capital goods, after having decreased in June. Imports moved down in both months, as declines in petroleum products--reflecting both lower prices and decreased volumes--more than offset large gains in automotive products following the easing of supply chain disruptions in Japan. Trade data for July suggested that net exports continued to boost U.S. real gross domestic product (GDP) growth in the third quarter. Monthly U.S. consumer price inflation picked up in July and August after slowing in May and June, but remained a bit lower than earlier in the year. Consumer energy prices stepped up in July and August but only partially retraced their decline over the previous two months, and the increases in food prices were somewhat below the pace seen early in the year. The consumer price index excluding food and energy rose at about the same average monthly rate in July and August as in the second quarter. Near-term inflation expectations from the Thomson Reuters/University of Michigan Surveys of Consumers in August and September stayed well below the elevated level seen in the spring, and longer-term inflation expectations remained stable. Available measures of labor compensation indicated that wage increases continued to be restrained by the large margin of slack in the labor market. Average hourly earnings for all employees posted a small gain, on net, over July and August, and their rate of increase from 12 months earlier remained subdued. Foreign economic growth declined in the second quarter. Growth slowed notably in Europe; economic activity also decelerated in the emerging market economies. Real GDP contracted in Canada due to a large decline in exports. Output also fell in Japan, reflecting the dislocations caused by the March earthquake. Part of the downshift in global economic growth appeared to have been driven by temporary supply chain disruptions caused by Japan's earthquake. Although the waning of these disruptions seemed to be supporting a rebound in foreign GDP growth in the third quarter, recent indicators suggested only sluggish gains in underlying economic activity. With the intensification of fiscal and financial stress in the euro area, measures of consumer and business confidence declined in August, and indicators of manufacturing activity in the region deteriorated. For many emerging market economies, the recent slowing in growth of economic activity was most evident in exports, industrial production, and other indicators of manufacturing activity. Inflation abroad eased in the second quarter as the effects of earlier increases in food and energy prices began to fade. More recently, however, increases in domestic food prices appeared to be pushing up consumer price inflation in some economies. Staff Review of the Financial Situation Financial markets were volatile over the intermeeting period as investors responded to mostly downbeat news on economic activity in the United States and abroad. Fluctuations in investors' level of concern about European fiscal and financial prospects also contributed to market volatility. The expected path of the federal funds rate moved down appreciably over the intermeeting period. Investors initially focused on the firmer forward guidance in the August FOMC statement indicating that the Committee anticipated that economic conditions were likely to warrant exceptionally low levels of the federal funds rate at least through mid-2013. Over subsequent weeks, weak economic data contributed to rising expectations of additional monetary accommodation; those expectations and increasing concerns about the financial situation in Europe led to an appreciable decline in intermediate- and longer-term nominal Treasury yields. Partly in reaction to the softer economic outlook, measures of inflation compensation for the next 5 years as well as 5 to 10 years ahead derived from nominal and inflation-protected Treasury securities each fell to the low end of their ranges for this year. Since early August, the equity prices of large U.S. financial institutions fell and their credit default swap (CDS) spreads widened. More-pronounced declines in equity prices and larger increases in CDS spreads occurred for some European financial institutions. Though many large European banks found it increasingly difficult, in recent weeks, to get unsecured dollar funding beyond the very short term, the conditions faced by U.S. financial institutions in these markets were little changed. In secured funding markets, term financing reportedly remained readily available for both domestic and European financial institutions through repurchase agreements backed by Treasury and agency collateral. However, some strains emerged late in the intermeeting period in the market for repurchase agreements backed by lower-quality, nontraditional collateral. In response to dollar funding pressures abroad, the Bank of England, the European Central Bank (ECB), and the Swiss National Bank announced that they would offer banks in their jurisdictions dollar loans for periods of approximately three months as well as continue to offer dollar loans for one-week periods; the Bank of Japan added to its previously announced program of three-month and seven-day dollar loans. Broad stock price indexes were volatile but increased, on net, since the August FOMC meeting, following sharp declines in the days just preceding that meeting. Gross public equity issuance by nonfinancial firms weakened substantially in recent weeks, and a large number of planned initial public offerings were shelved amid the heightened market volatility. Spreads of yields on investment- and speculative-grade corporate bonds over those on comparable-maturity Treasury securities rose significantly over the intermeeting period, reaching levels last registered in late 2009, and average bid prices in the secondary market for syndicated leveraged loans declined. Credit flows in August offered additional evidence that debt markets had become less hospitable to lower-rated nonfinancial firms. Bond issuance by speculative-grade firms nearly came to a halt, and the volume of new leveraged loans financed by institutional investors appeared to drop sharply after having moved down in July. However, net bond issuance by investment-grade companies remained robust in August despite wider spreads, and nonfinancial commercial paper outstanding increased slightly. In the September 2011 Senior Credit Officer Opinion Survey on Dealer Financing Terms, dealers reported only small changes in credit terms across major classes of counterparties over the past three months. Respondents noted that the use of financial leverage by hedge funds decreased somewhat over the same period. Dealers also indicated that their clients' willingness to bear risk generally had declined somewhat; that was particularly true of hedge funds. Financing conditions for commercial real estate remained weak. Issuance of commercial mortgage-backed securities (CMBS) slowed further in July and August, and investors appeared to demand greater compensation for risk. Prices of most types of commercial properties remained depressed despite a slight decline in vacancy rates in the second quarter. Delinquency rates on loans that back existing CMBS hovered at an elevated level in August, but delinquency rates on commercial real estate loans held by banks decreased in the second quarter. Residential MBS yields and residential mortgage interest rates declined, on net, over the intermeeting period to historically low levels, but their spreads to yields on long-term Treasury securities increased. However, low mortgage rates spurred little refinancing activity, in part because of tight underwriting standards and low levels of home equity for many households. Residential mortgage debt contracted further in the second quarter, and the volume of mortgage applications to purchase homes moved down so far in the third quarter. Rates of serious mortgage delinquency continued to moderate but remained high, while the rate at which prime mortgages moved into delinquency stepped up, on balance, in recent months. Consumer credit increased at a solid pace in July, as a sizable increase in nonrevolving credit--driven by a surge in federally funded student loans--more than offset a decrease in revolving credit. Issuance of consumer asset-backed securities moved down in August, but spreads on these securities remained low. Delinquency rates for several categories of consumer loans moved down further in recent months, with some reaching levels not seen since the 2008–09 recession began. Core commercial bank loans--the sum of commercial and industrial (C&I), real estate, and consumer loans--expanded slightly in July and August. C&I loans grew strongly, consumer loans showed tepid growth, and real estate loans continued to decline. The upturn in lending was concentrated at large domestic and foreign institutions; at smaller banks, core loans declined in July and August at about the same pace as in recent quarters. M2 surged in July and August, as investors and asset managers sought the relative safety and liquidity of bank deposits and other assets that make up the M2 aggregate. Notably, institutional investors, concerned about exposures of money funds to European financial institutions, shifted from prime money funds to bank deposits, and money fund managers accumulated sizable bank deposits in anticipation of potentially large redemptions by investors. In addition, retail investors evidently placed redemptions from equity and bond mutual funds into bank deposits and retail money market funds. The foreign exchange value of the dollar increased over the intermeeting period, reflecting a flight to safety that also contributed to lower benchmark sovereign yields in Germany, the United Kingdom, and Canada. In contrast, the yield on two-year Greek sovereign bonds rose sharply as market participants became increasingly concerned that Greece might default on its sovereign debt. Equity prices in the euro area decreased over the intermeeting period, following sharp declines in early August. After falling steeply before the August FOMC meeting, emerging market equity prices were little changed, on net, over the period. The European Central Bank continued to purchase, in the secondary market, sovereign debt of euro-area countries. Yields on Italian and Spanish debt, which declined following reported ECB purchases in early August, drifted higher during the intermeeting period. Prices of money market futures contracts indicated that monetary policy was expected to become more accommodative in both the euro area and the United Kingdom. The Swiss National Bank took several steps to ease monetary policy, including intervening in the foreign exchange market to counter further appreciation of its currency and eventually announcing that it is prepared to buy unlimited quantities of foreign currency to prevent the Swiss franc from trading in the foreign exchange market at a rate below 1.2 Swiss francs per euro. Citing concerns over the global economic outlook, the central bank of Brazil reduced its policy rate after having raised it several times earlier this year. In contrast, China continued to tighten its monetary policy, extending reserve requirements to a wider range of bank liabilities as it attempted to rein in off-balance-sheet lending by its banks. Staff Economic Outlook In the economic forecast prepared for the September FOMC meeting, the staff lowered its projection for the increase in real GDP in the second half of 2011 and in the medium term. The incoming data on household and business spending were about as expected, on balance, but labor market conditions and indicators of near-term economic activity, such as consumer and business sentiment, were weaker than anticipated. In addition, financial conditions deteriorated since the time of the previous forecast as investors pulled back from riskier assets. Nevertheless, the staff continued to forecast that economic activity would increase more rapidly in the second half of this year than over the first half, as supply chain disruptions in the motor vehicle sector eased. In the medium term, the staff still projected real GDP to accelerate gradually, supported by accommodative monetary policy, further increases in credit availability, and improvements in consumer and business confidence from their current low levels. The increase in real GDP was expected to be sufficient to reduce the unemployment rate only slowly over the projection period, and the jobless rate was anticipated to remain elevated at the end of 2013. The staff's projection for inflation was little changed from its forecast at the time of the August FOMC meeting. The upward pressure on consumer prices from increases in import and commodity prices earlier in the year, along with the temporary boost to motor vehicle prices from low inventories, were expected to recede further in the coming quarters. With stable long-run inflation expectations and considerable slack in labor and product markets anticipated to persist over the forecast period, the staff continued to project that inflation would be subdued in 2012 and 2013. Participants' Views on Current Conditions and the Economic Outlook In their discussion of the economic situation and outlook, meeting participants agreed that the information received during the intermeeting period indicated that economic growth remained slow but did not suggest a contraction in activity. Temporary factors that had contributed to slower growth during the first half of the year had partly reversed, contributing to some rebound in final sales and production, particularly in the manufacturing sector where progress had been made in resolving supply chain disruptions. But stresses in global financial markets, sluggish growth in households' real incomes, and heightened uncertainty about economic prospects seemed to have contributed to lower consumer and business sentiment and to be weighing on economic growth. Recent indicators pointed to continuing weakness in overall labor market conditions, and the unemployment rate remained elevated. Inflation appeared to have moderated since earlier in the year as prices of energy and some commodities declined from their peaks, but inflation had not yet come down as much as participants had expected earlier this year. Labor costs remained subdued. Looking ahead, participants continued to expect some pickup in the pace of recovery over coming quarters but anticipated that the unemployment rate would decline only gradually. They generally judged that risks to the growth outlook, including strains in global financial markets, were significant and tilted to the downside; moreover, slow growth left the recovery more vulnerable to negative shocks. With longer-term inflation expectations remaining stable and the effects of past increases in energy and commodity prices continuing to dissipate, most participants saw both core and headline inflation as likely to settle, over coming quarters, at or below the levels they see as most consistent with their dual mandate. Participants continued to see the outlook for growth and inflation as more uncertain than usual. Participants noted modest growth in consumer spending on average in recent months, with some rebound in purchases of new motor vehicles as manufacturers made progress in resolving supply chain disruptions and increased the availability of popular models. Surveys suggested that households were pessimistic about their future incomes, and consumer confidence had dropped to historically low levels. Low confidence, continuing efforts to repair balance sheets, and heightened caution in the face of an uncertain economic environment were seen as factors likely to weigh on household spending. Several participants pointed to depressed home prices and financial constraints, including still-tight credit conditions for many households, as also likely to restrain consumer spending for a time. However, household debt-service burdens had declined, indicating that there had been further progress in repairing household balance sheets. Business sentiment had worsened, seemingly in response to weaker economic prospects and increased downside risks to the outlook for U.S. and global growth. Contacts at communications, technology, and transportation firms indicated that growth had slowed in those sectors; surveys also indicated that growth in the manufacturing sector had weakened during the summer. One participant suggested that hurricanes and subsequent flooding had contributed to the slowing in some parts of the country. In contrast, business contacts reported that commodity-related sectors such as energy, agriculture, and mining continued to show strong gains; tourism also appeared to be doing well. Exports remained a bright spot for U.S. manufacturers and commodity producers. Business investment in equipment and software had continued to expand in recent months, but some contacts expressed concern that firms would cut capital spending if their sales slowed further. The housing sector remained depressed, with construction at very low levels and seen as likely to remain so given the weakness in new home sales and the continuing flow of foreclosed properties into the market. Though mortgage rates were very low, spreads between mortgage rates and yields on Treasury securities were unusually wide. Moreover, still-tight credit standards meant that many households were unable to qualify for loans to buy a home, and the drop in house prices in recent years left others unable to refinance an existing higher-rate mortgage. Nonresidential construction generally remained weak, apart from investment in extractive industries, and forward-looking indicators of nonresidential construction had dropped. Meeting participants generally noted that overall labor market conditions had shown no improvement or had deteriorated in recent months and the unemployment rate remained elevated. Even after adjusting for the effects of strikes on reported payrolls, the employment report for August showed weak job gains. Moreover, both the average workweek and aggregate hours worked declined. Contacts reported that slower growth, depressed business confidence, and uncertainty about the economic outlook were restraining hiring as well as capital investment; many also cited uncertainty about regulatory and tax policies as contributing to businesses' reluctance to spend. Some business contacts reported that their firms had made contingency plans to reduce output and employment if demand for their products were to turn down. Participants generally agreed that sluggish job growth and the elevated unemployment rate reflected both weak demand for goods and services and a mismatch between the characteristics of the unemployed and the needs of the employers that currently have jobs available, but they had varying views about the relative importance of these two factors. Many participants judged that weak demand was of most importance, while a few argued that structural and geographic mismatches were key. A few commented that business contacts reported receiving large numbers of applications for relatively low-skilled positions but having difficulty finding and hiring candidates for some highly skilled positions. Several participants again noted that the exceptionally high level of long-duration unemployment could lead to permanent negative effects on the skills and employment prospects of those affected and so reduce the economy's longer-run productive potential. Participants noted that financial markets were volatile over the intermeeting period and that financial conditions were strained at times, as investors reacted to the incoming economic data and to news about European fiscal and financial developments. Several participants argued that broader financial conditions had become less accommodative over the intermeeting period: Risk spreads had widened appreciably, likely reflecting a reduced willingness of investors to bear risk, a weaker outlook for growth in the United States and globally, and greater uncertainty about economic prospects. On the positive side, some participants noted that the reduction in leverage and increase in financial firms' liquidity cushions since the height of the financial crisis likely had attenuated the adverse effects of heightened risk aversion. Contacts in the banking sector reported that U.S. banks remained willing to lend to qualified customers, but that loan demand was weak. While noting that conditions in bank funding markets had tightened, particularly for European banks, participants observed that the capital and liquidity positions of U.S. banks had strengthened in recent quarters and that the credit quality of both business and household loans had continued to improve. Nonetheless, some large U.S. banks had seen further pressure on their stock prices and CDS spreads. Participants agreed that, if European policymakers did not respond effectively, European sovereign debt and banking problems could intensify, with potentially serious spillovers to the U.S. economy. However, it was noted that the ECB was providing ample liquidity to European banks, and that it had substantial capacity to provide additional liquidity through its lending facilities if necessary. Most participants agreed that inflation appeared to have moderated in recent months compared with earlier in the year as prices of energy and some commodities declined from their peaks, though the moderation was not as substantial as many participants had expected. Longer-term inflation expectations had remained stable. Most participants anticipated that, with stable inflation expectations, significant slack in labor and product markets, slow wage growth, and little evidence of pricing power among firms, inflation was likely to decline moderately over time. Several suggested that slowing growth in the United States and abroad made a new surge in commodity prices unlikely. However, some noted that core as well as headline inflation had moved up, on balance, since last fall. A few suggested that the juxtaposition of higher core inflation and somewhat lower unemployment could mean that the degree of slack in labor markets and the level of potential output were lower than the Committee had thought. Some argued that the rise in core inflation from very low levels reflected the accommodative stance of monetary policy and indicated that the large-scale asset purchases the Committee undertook from November through June had been a successful response to the deflation risks of a year ago. Many participants judged that the risks to the outlook for inflation were roughly balanced. Some saw medium-run inflation risks as tilted to the downside, in light of persistent resource slack; some others argued that the accommodative stance of monetary policy and the upward trend in measures of core inflation this year suggested inflation risks were tilted to the upside. Participants generally judged that there was relatively little risk of deflation. One commented that surveys showed that forecasters saw a low likelihood of deflation; a second, however, noted that a measure of the probability of deflation calculated from prices of Treasury inflation-protected securities (TIPS) had declined as the Federal Reserve conducted its second large-scale asset purchase program but more recently had been rising. Participants saw considerable uncertainty surrounding the outlook for a gradual pickup in economic growth. It was again noted that the cyclical impetus to economic expansion appeared to be weaker than in past recoveries, but that the reasons for the weakness were unclear, contributing to greater uncertainty about the economic outlook. Several commented that, with households and businesses seeking to reduce leverage rather than to borrow and with housing markets in distress, some of the normal mechanisms through which monetary policy actions are transmitted to the real economy appeared to be attenuated. Many participants saw significant downside risks to economic growth. While they did not anticipate a downturn in economic activity, several remarked that, with growth slow, the recovery was more vulnerable to adverse shocks. Risks included the possibility of more pronounced or more protracted deleveraging by households, the chance of a larger-than-expected near-term fiscal tightening, and potential spillovers to the United States if the financial situation in Europe were to worsen appreciably. Participants agreed to consider further how best to use their monetary policy and liquidity tools to deal with such shocks if they were to occur. Committee Policy Action In the discussion of monetary policy for the period ahead, most members agreed that the revisions to the economic outlook warranted some additional monetary policy accommodation to support a stronger recovery and to help ensure that inflation, over time, was at a level consistent with the Committee's dual mandate. While they recognized that monetary policy alone could not completely address the economy's ills, most members judged that additional accommodation could contribute importantly to better outcomes in terms of the Committee's dual mandate of maximum employment and price stability. Those viewing greater policy accommodation as appropriate at this meeting generally supported a maturity extension program that would combine asset purchases and sales to extend the average maturity of securities held in the SOMA without generating a substantial expansion of the Federal Reserve's balance sheet or reserve balances. Specifically, those members supported a program under which the Committee would announce its intention to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. They expected this program to put downward pressure on longer-term interest rates and to help make broader financial conditions more accommodative. While the scale of such a maturity extension program was necessarily limited by the amount of shorter-term securities in the SOMA portfolio, most members judged the action as appropriate, given economic conditions and the outlook. Two members said that current conditions and the outlook could justify stronger policy action, but they supported undertaking the maturity extension program at this meeting as it did not rule out additional steps at future meetings. Three members concluded that additional accommodation was not appropriate at this time. The Committee discussed whether to specify the parameters of the maturity extension program by stating its intention to complete the full set of transactions by June 2012 or by stating that it would undertake these transactions at a specified monthly pace. Members saw benefits to both approaches: The former would provide the public greater clarity about the likely scale of the program and the latter might allow the Committee greater flexibility to adjust the scale of the program in response to unexpected economic developments. A majority favored the first approach. Members noted, however, that the Committee will continue to regularly review the size and composition of its securities holdings and that it is prepared to adjust those holdings as appropriate. Most members also supported a change in the Committee's reinvestment policy. To help support conditions in mortgage markets, the Committee decided to reinvest principal received from its holdings of agency debt and agency MBS in agency MBS rather than continuing to reinvest in longer-term Treasury securities as had been the Committee's practice for more than a year. The effect of this change will be to keep the SOMA's holdings of agency securities at an approximately constant level; under the previous practice, those holdings were declining on an ongoing basis. This change in reinvestment policy was expected to help reduce the spread between yields on mortgage-backed securities and those on comparable-maturity Treasury securities seen this year and so contribute to lower mortgage rates. Members also noted that the change in reinvestment policy could help prevent the shares of outstanding longer-term Treasury securities held by the Federal Reserve from reaching levels high enough to result in a deterioration in Treasury market functioning. One member who opposed the maturity extension program also opposed the change in reinvestment policy because he judged that it would not benefit housing markets. At the same time, the Committee decided to maintain its existing policy of rolling over maturing Treasury securities at auction. The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 percent and to reaffirm its anticipation that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. A couple of members noted that they would prefer to change the Committee's forward guidance to provide greater clarity about the economic conditions that would be likely to warrant maintaining exceptionally low levels of the target federal funds rate, but no decision was taken on this point. The Committee agreed that it was important to acknowledge, in the statement to be released following the meeting, that economic growth remained slow and that indicators pointed to continuing weakness in overall labor market conditions. It also agreed to note that inflation appeared to have moderated since earlier in the year as prices of energy and some commodities had declined from their recent peaks, and that longer-term inflation expectations remained stable. Members generally continued to expect some pickup in the pace of the economic recovery over coming quarters but anticipated that the unemployment rate would decline only gradually and agreed that there were significant downside risks to the economic outlook, including strains in global financial markets. The Committee again anticipated that inflation would settle, over coming quarters, at levels at or below those consistent with the Committee's mandate as the effects of past energy and commodity price increases dissipate further. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to purchase, by the end of June 2012, Treasury securities with remaining maturities of approximately 6 years to 30 years with a total face value of $400 billion, and to sell Treasury securities with remaining maturities of 3 years or less with a total face value of $400 billion. The Committee also directs the Desk to maintain its existing policy of rolling over maturing Treasury securities into new issues and to reinvest principal payments on all agency debt and agency mortgage-backed securities in the System Open Market Account in agency mortgage-backed securities in order to maintain the total face value of domestic securities at approximately $2.6 trillion. The Committee directs the Desk to engage in dollar roll transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability." The vote encompassed approval of the statement below to be released at 2:15 p.m.: "Information received since the Federal Open Market Committee met in August indicates that economic growth remains slow. Recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated. Household spending has been increasing at only a modest pace in recent months despite some recovery in sales of motor vehicles as supply-chain disruptions eased. Investment in nonresidential structures is still weak, and the housing sector remains depressed. However, business investment in equipment and software continues to expand. Inflation appears to have moderated since earlier in the year as prices of energy and some commodities have declined from their peaks. Longer-term inflation expectations have remained stable. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect some pickup in the pace of recovery over coming quarters but anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, there are significant downside risks to the economic outlook, including strains in global financial markets. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate further. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations. To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to extend the average maturity of its holdings of securities. The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate. To help support conditions in mortgage markets, the Committee will now reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. In addition, the Committee will maintain its existing policy of rolling over maturing Treasury securities at auction. The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools as appropriate." Voting for this action: Ben Bernanke, William C. Dudley, Elizabeth Duke, Charles L. Evans, Sarah Bloom Raskin, Daniel K. Tarullo, and Janet L. Yellen. Voting against this action: Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser. Messrs. Fisher, Kocherlakota, and Plosser dissented because they did not support additional policy accommodation at this time. Mr. Fisher saw a maturity extension program as providing few, if any, benefits in support of job creation or economic growth, while it could potentially constrain or complicate the timely removal of policy accommodation. In his view, any reduction in long-term Treasury rates resulting from this policy action would likely lead to further hoarding by savers, with counterproductive results on business and consumer confidence and spending behaviors. He felt that policymakers should instead focus their attention on improving the monetary policy transmission mechanism, particularly with regard to the activity of community banks, which are vital to small business lending and job creation. Mr. Kocherlakota's perspective on the policy decision was again shaped by his view that in November 2010, the Committee had chosen a level of accommodation that was well calibrated for the condition of the economy. Since November, inflation, and the one-year-ahead forecast for inflation, had risen, while unemployment, and the one-year-ahead forecast for unemployment, had fallen. He did not believe that providing more monetary accommodation was the appropriate response to those changes in the economy, given the current policy framework. Mr. Plosser felt that a maturity extension program would do little to improve near-term growth or employment, in light of the ongoing structural adjustments and fiscal challenges both in the United States and abroad. Moreover, in his view, with inflation continuing to run above earlier forecasts, such a program could risk adding unwanted inflationary pressures and complicate the eventual exit from the period of extraordinarily accommodative monetary policy. Following the policy vote, the Manager of the System Open Market Account summarized how the Desk would implement the Committee's decisions. To implement the maturity extension program, the Desk would distribute purchases about evenly across nominal Treasury securities with 6 to 8 years to maturity, with 8 to 10 years to maturity, and with 10 to 30 years to maturity; the Desk would also buy a small amount of TIPS with remaining maturities of 6 to 30 years. This distribution would allocate a much larger share of purchases to longer maturities than was the case in the Committee's previous asset purchase programs. At the same time, the Desk would sell, from the SOMA portfolio, Treasury securities with remaining maturities of 3 months to 3 years. All Treasury purchases and sales would be conducted using competitive auctions. With respect to the MBS reinvestment program, the Desk would concentrate purchases in newly issued agency-backed MBS and would conduct purchases through a competitive bidding process. It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, November 1-2, 2011. The meeting adjourned at 12:30 p.m. on September 21, 2011. Secretary's Note: The following information regarding the June 21-22, 2011 FOMC meeting was inadvertently omitted from previous minutes. By unanimous vote at that meeting, the Committee ratified the Desk's domestic transactions since the April 26-27, 2011 meeting, and by notation vote completed on July 11, 2011, the Committee unanimously approved the minutes of the June 21-22 FOMC meeting.   _____________________________ William B. English Secretary   Return to top

2011-09-21

Statement

Information received since the Federal Open Market Committee met in August indicates that economic growth remains slow. Recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated. Household spending has been increasing at only a modest pace in recent months despite some recovery in sales of motor vehicles as supply-chain disruptions eased. Investment in nonresidential structures is still weak, and the housing sector remains depressed. However, business investment in equipment and software continues to expand. Inflation appears to have moderated since earlier in the year as prices of energy and some commodities have declined from their peaks. Longer-term inflation expectations have remained stable. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect some pickup in the pace of recovery over coming quarters but anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, there are significant downside risks to the economic outlook, including strains in global financial markets. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate further. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations. To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to extend the average maturity of its holdings of securities. The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate. To help support conditions in mortgage markets, the Committee will now reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. In addition, the Committee will maintain its existing policy of rolling over maturing Treasury securities at auction. The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools as appropriate. Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action were Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, who did not support additional policy accommodation at this time. Related Information Maturity Extension Program and Reinvestment Policy Frequently Asked Questions: Maturity Extension Program and Reinvestment Policy   Current FAQs September 21, 2011 What is the Federal Reserve's maturity extension program (referred to by some as "operation twist") and what is its purpose?

2011-08-30

Minute

A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held in the offices of the Board of Governors in Washington, D.C., on Tuesday, August 9, 2011, at 8:00 a.m. PRESENT: Ben Bernanke, Chairman William C. Dudley, Vice Chairman Elizabeth Duke Charles L. Evans Richard W. Fisher Narayana Kocherlakota Charles I. Plosser Sarah Bloom Raskin Daniel K. Tarullo Janet L. Yellen Christine Cumming, Jeffrey M. Lacker, Dennis P. Lockhart, Sandra Pianalto, and John C. Williams, Alternate Members of the Federal Open Market Committee James Bullard, Thomas M. Hoenig, and Eric Rosengren, Presidents of the Federal Reserve Banks of St. Louis, Kansas City, and Boston, respectively William B. English, Secretary and Economist Matthew M. Luecke, Assistant Secretary David W. Skidmore, Assistant Secretary Michelle A. Smith, Assistant Secretary Thomas C. Baxter, Deputy General Counsel Richard M. Ashton, Assistant General Counsel Thomas A. Connors, David Reifschneider, Daniel G. Sullivan, David W. Wilcox, and Kei-Mu Yi, Associate Economists Brian Sack, Manager, System Open Market Account Jennifer J. Johnson, Secretary of the Board, Office of the Secretary, Board of Governors Patrick M. Parkinson, Director, Division of Banking Supervision and Regulation, Board of Governors Robert deV. Frierson, Deputy Secretary, Office of the Secretary, Board of Governors Andreas Lehnert, Deputy Director, Office of Financial Stability Policy and Research, Board of Governors Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors Seth B. Carpenter, Senior Associate Director, Division of Monetary Affairs, Board of Governors; Michael Leahy, Senior Associate Director, Division of International Finance, Board of Governors; Lawrence Slifman and William Wascher, Senior Associate Directors, Division of Research and Statistics, Board of Governors Andrew T. Levin, Senior Adviser, Office of Board Members, Board of Governors; Stephen A. Meyer, Senior Adviser, Division of Monetary Affairs, Board of Governors Joyce K. Zickler, Visiting Senior Adviser, Division of Monetary Affairs, Board of Governors David E. Lebow, Associate Director, Division of Research and Statistics, Board of Governors Joshua Gallin, Deputy Associate Director, Division of Research and Statistics, Board of Governors; Fabio M. Natalucci, Deputy Associate Director, Division of Monetary Affairs, Board of Governors Beth Anne Wilson, Assistant Director, Division of International Finance, Board of Governors Penelope A. Beattie, Assistant to the Secretary, Office of the Secretary, Board of Governors John C. Driscoll, Senior Economist, Division of Monetary Affairs, Board of Governors Carol Low, Open Market Secretariat Specialist, Division of Monetary Affairs, Board of Governors Randall A. Williams, Records Management Analyst, Division of Monetary Affairs, Board of Governors David Sapenaro, First Vice President, Federal Reserve Bank of St. Louis Mark S. Sniderman, Executive Vice President, Federal Reserve Bank of Cleveland David Altig, Alan D. Barkema, and Geoffrey Tootell, Senior Vice Presidents, Federal Reserve Banks of Atlanta, Kansas City, and Boston, respectively Chris Burke, Fred Furlong, Tom Klitgaard, Evan F. Koenig, and Daniel L. Thornton, Vice Presidents, Federal Reserve Banks of New York, San Francisco, New York, Dallas, and St. Louis, respectively Keith Sill, Assistant Vice President, Federal Reserve Bank of Philadelphia Robert L. Hetzel, Senior Economist, Federal Reserve Bank of Richmond Developments in Financial Markets and the Federal Reserve's Balance Sheet The Manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets during the period since the Federal Open Market Committee (FOMC) met on June 21–22, 2011. He also reported on System open market operations, including the continuing reinvestment into longer-term Treasury securities of principal payments received on the SOMA's holdings of agency debt and agency-guaranteed mortgage-backed securities. By unanimous vote, the Committee ratified the transactions by the Open Market Desk of the Federal Reserve Bank of New York over the intermeeting period. Staff Review of the Economic Situation The information reviewed at the August 9 meeting indicated that the pace of the economic recovery remained slow in recent months and that labor market conditions continued to be weak. In addition, revised data for 2008 through 2010 from the Bureau of Economic Analysis indicated that the recent recession was deeper than previously thought and that the level of real gross domestic product (GDP) had not yet attained its pre-recession peak by the second quarter of 2011. Moreover, the downward revision to first-quarter GDP growth and the slow growth reported for the second quarter indicated that the recovery was quite sluggish in the first half of this year. Overall consumer price inflation moderated in recent months, and survey measures of long-run inflation expectations remained stable. Private nonfarm employment rose at a considerably slower pace in June and July than earlier in the year, and employment in state and local governments continued to trend lower. The unemployment rate edged up, on net, since the beginning of the year, and long-duration unemployment remained very high. Meanwhile, the labor force participation rate moved down further through July. Initial claims for unemployment insurance stepped down some in recent weeks but remained elevated, and indicators of hiring showed no improvement. Manufacturing production was unchanged in June. Supply chain disruptions associated with the earthquake in Japan continued to hinder production at motor vehicle manufacturers and the firms that supply them. Excluding motor vehicles and parts, factory output posted only a modest increase. The manufacturing capacity utilization rate held about flat in recent months. With auto manufacturers expecting supply chain disruptions to ease, motor vehicle assembly schedules called for a substantial step-up in production in the third quarter, and initial estimates of production in June were consistent with such a step-up. But broader indicators of near-term manufacturing activity, such as the diffusion indexes of new orders from the national and regional manufacturing surveys, softened to levels consistent with only small gains in production in the coming months. Real consumer spending was nearly unchanged in the second quarter. Motor vehicle purchases declined during the spring when the availability of some models was limited, but rebounded somewhat in July as supplies improved. Consumer spending on goods and services other than motor vehicles also appeared soft through June. Labor earnings rose in the second quarter, but increases in consumer prices offset much of the gain in nominal income. Consumer sentiment weakened markedly in July, and the Thomson Reuters/University of Michigan sentiment index fell to levels last seen in early 2009. The housing market remained depressed. Although single-family housing starts moved up some in June, permit issuance stayed low. Similarly, sales of new and existing single-family homes were subdued in recent months, and home prices continued to trend lower. New construction remained constrained by the overhang of foreclosed or distressed properties as well as by weak demand in an environment of uncertainty about future home prices and tight underwriting standards for mortgage loans. Real business spending on equipment and software rose at a modest pace in the second quarter, reflecting strong increases in outlays for high-tech equipment that more than offset declines in spending in many other equipment categories. Nominal new orders for nondefense capital goods excluding aircraft continued to rise through June, and orders remained well above shipments, suggesting further gains in outlays for equipment and software in the near term. However, indicators of business conditions and sentiment weakened in June and July. Business investment in nonresidential structures appeared to have stabilized at a low level in recent months, with vacancy rates elevated and construction financing conditions still tight. Outlays for drilling and mining equipment continued to increase. In the second quarter, businesses appeared to add to inventories at a moderate rate, as a drawdown in motor vehicle inventories associated with production disruptions was offset by higher accumulation elsewhere. In most industries outside of the motor vehicle sector, inventories seemed to be reasonably well aligned with sales. Real federal purchases turned up in the second quarter, as defense expenditures rebounded after declining noticeably in the preceding quarter. At the state and local level, real purchases continued to decline in response to budgetary pressures; these governments continued to reduce payrolls, and their real construction outlays fell sharply. The U.S. international trade deficit widened significantly in May in nominal terms, as exports edged down and imports moved up strongly. Declines in exports were concentrated in commodity-intensive categories such as industrial supplies and agricultural goods; sales of capital goods and automotive products increased. The rise in imports importantly reflected increases in spending on petroleum products (mainly the result of higher prices rather than increased volumes) and on capital goods, especially computers. For the second quarter as a whole, the advance release of the National Income and Product Accounts (NIPA) indicated that real exports of goods and services increased more than real imports, with the result that net exports added significantly to real GDP growth. After decelerating in the preceding two months, indexes of U.S. consumer prices declined in June, reflecting a substantial drop in consumer energy prices. However, survey data indicated some backup in gasoline prices in July. The price index for personal consumption expenditures (PCE) excluding food and energy posted a small increase in June, and the PCE price index for non-energy services was essentially unchanged. In contrast, prices of nonfood, non-energy goods were apparently boosted by upward pressure from earlier increases in commodity and import prices, and motor vehicle prices rose further, reflecting the extremely low levels of vehicle inventories. Near-term expected inflation from the Thomson Reuters/University of Michigan Surveys of Consumers moved down again in July from its elevated level in the spring, and longer-term inflation expectations remained stable. Nominal hourly labor compensation, as measured both by compensation per hour in the nonfarm business sector and by the employment cost index, increased at a moderate rate over the year ending in the second quarter. Similarly, the 12-month change in average hourly earnings of all employees remained moderate in July. Productivity in the nonfarm business sector rose only slightly over the past four-quarter period, so unit labor costs posted a modest increase. Foreign economic growth appeared to have slowed significantly in recent months. Real GDP growth declined sharply in the United Kingdom in the second quarter, and industrial production data and purchasing managers surveys pointed to a similar slowdown in Canada. Retail sales and business sentiment for the euro area also weakened in recent months amid intensified concerns over the fiscal situation of the peripheral euro-area countries. Economic performance in the emerging market economies was somewhat better, but indicators for those economies also suggested some cooling from the very rapid growth earlier this year. By contrast, the Japanese economy has begun to recover from the March disaster, with exports and production both retracing much of their substantial losses. Foreign inflation dipped in the second quarter as the effects of previous increases in food and energy prices began to dissipate. Staff Review of the Financial Situation Over the intermeeting period, U.S. financial markets were strongly influenced by developments regarding the fiscal situations in the United States and in Europe and by generally weaker-than-expected readings on economic activity. Throughout the period, waxing and waning concerns about the sovereign debt of peripheral euro-area countries appeared to have an effect on investor appetite for risk, leading to volatility in many asset markets. Late in the period, investor focus appeared to turn to the U.S. debt ceiling and the potential for delayed debt service payments by the Treasury Department, the possibility of a downgrade of U.S. sovereign debt, and the prospects for significant long-term fiscal consolidation. Liquidity and funding in money markets deteriorated in the last week of July, and interest rates on a number of short-term funding instruments increased markedly. The strains in these markets eased after legislation to raise the debt ceiling and to cut the federal budget deficit was signed into law on August 2. U.S. equity prices fell considerably in the last week of July and the first week of August, reportedly reflecting recent weaker-than-expected economic data releases, and they declined further after the August 5 announcement by Standard & Poor's of its downgrade of long-term U.S. sovereign debt. The decisions by the FOMC at its June meeting to complete its asset purchase program and to maintain the 0 to 1/4 percent target range for the federal funds rate were about in line with market expectations and elicited little market reaction; the same was true of the accompanying statement and the subsequent press briefing by the Chairman. Over the intermeeting period, investors marked down the expected path for the federal funds rate substantially, reflecting incoming economic data that were weaker than expected and concomitant concerns about the prospects for global growth. Yields on nominal Treasury securities also fell notably, on net, over the intermeeting period. The Federal Reserve's Treasury purchase program was completed on schedule on June 30. Broad U.S. stock price indexes fell sharply, on net, over the intermeeting period, as increased concerns about economic growth appeared to overshadow generally strong second-quarter corporate earnings reports. Option-implied volatility on the S&P 500 index jumped late in the period. Yields on both investment- and speculative-grade corporate bonds fell a little less than those on comparable-maturity Treasury securities, leaving risk spreads wider. Financial market indicators of inflation expectations were mixed over the intermeeting period. Net debt financing by nonfinancial corporations was solid in July, although below the elevated pace posted in the second quarter. Gross bond issuance fell, and the outstanding amount of commercial and industrial (C&I) loans on banks' books was about flat. Nonfinancial commercial paper (CP) posted a sizable gain. The market for CP issued by financial firms experienced some strains late in the period as institutional money market mutual funds reportedly increased their cash positions and sought to decrease exposure to CP issued by some entities perceived to be less creditworthy. Issuance of syndicated leveraged loans remained strong in the second quarter. The pace of gross public equity issuance by nonfinancial firms fell somewhat in July from its solid pace in the second quarter. Most indicators of business credit quality continued to improve. Commercial real estate markets remained weak. Available data for the second quarter indicated that commercial mortgage debt contracted, prices of commercial properties were generally depressed, and issuance of commercial mortgage-backed securities (CMBS) slowed. However, the delinquency rate in June for loans that back existing CMBS stayed below its recent peak, and vacancy rates for commercial properties, while still high, generally continued to edge lower. Rates on conforming fixed-rate residential mortgages declined, on net, over the intermeeting period. Mortgage refinancing activity picked up but remained relatively subdued. Outstanding residential mortgage debt is estimated to have contracted further in the second quarter. Rates of serious mortgage delinquency continued to moderate but remained high, while the rate of new delinquencies on prime mortgages flattened out in recent months at an elevated level. Conditions in consumer credit markets generally continued to improve. Total consumer credit expanded at a moderate rate in May as both nonrevolving and revolving credit posted gains. Issuance of consumer asset-backed securities remained solid in July, although some deals later in the month were reportedly postponed a few days while issuers awaited the outcome of the debt ceiling deliberations. Delinquency rates for most types of consumer loans moved down in recent months. Core commercial bank loans--the sum of C&I, real estate, and consumer loans--were about flat over the months of June and July, as a slowdown in lending to businesses was offset by a pickup in loans to households. The July Senior Loan Officer Opinion Survey on Bank Lending Practices showed that respondents again eased lending standards to some degree on all major loan types other than residential real estate loans. Nonetheless, banks also indicated that the current levels of their lending standards for all loan types were between moderate and relatively tight when compared with the range of standards that had prevailed since 2005. Nearly all second-quarter earnings reports from large banking companies exceeded expectations. M2 expanded rapidly in June and July. Liquid deposits, the largest component of M2, increased robustly, likely reflecting safe-haven flows from riskier assets along with temporary increases in the amount of deposits that money market mutual funds held at their custodian banks. The rise in currency moderated over those two months but remained robust. Headline equity indexes abroad and foreign benchmark sovereign yields declined over the intermeeting period in apparent response to signs of a slowdown in the pace of global economic activity and reduced demand for risky assets. At the same time, concerns about fiscal deficits and debt sustainability drove yields on the sovereign debt of Greece, Ireland, Portugal, Spain, and Italy to record highs relative to yields on German bunds, although later in the period, spreads fell back somewhat. Stock prices of European banks, which are significant investors in sovereign bonds issued by the peripheral euro-area countries, declined appreciably, and some of these banks reportedly faced tighter funding conditions toward the end of the intermeeting period. The broad nominal index of the U.S. dollar fluctuated over the period in response to changes in investors' assessment of the outlook for the U.S. economy, prospects for the lifting of the U.S. debt ceiling, and the situation in the European economies. On net over the intermeeting period, the dollar rose modestly after having depreciated earlier this year. The European Central Bank (ECB) boosted its policy rate in July, a move that was widely anticipated. As indicated by money market futures quotes, however, the expected pace of monetary policy tightening declined substantially for the ECB as well as for other central banks in advanced foreign economies. Following its August meeting, the ECB expanded and extended its offerings of term liquidity and resumed purchases of sovereign debt in the secondary market. Central banks in several emerging market economies, including China, continued to tighten policy in response to inflationary pressures. Authorities in some emerging market economies also took measures to limit capital inflows and credit growth. Staff Economic Outlook The information on economic activity received since the June FOMC meeting was weaker than the staff had anticipated, and the projection for real GDP growth in the second half of 2011 and in 2012 was marked down notably. Moreover, the lower estimates of real GDP in recent years that were contained in the annual revisions to the NIPA led the staff to lower its estimate of potential GDP growth, both during recent years and over the forecast period, and to mark down further the staff forecast. The staff continued to expect some rebound in economic activity in the near term as the Japan-related supply chain disruptions in the motor vehicle sector eased. More generally, the staff still projected real GDP to accelerate gradually over the next year and a half, supported by accommodative monetary policy, improved credit availability, and a pickup in consumer and business sentiment. However, the increase in real GDP was projected to be sufficient to reduce slack in the labor market only slowly, and the unemployment rate was expected to remain elevated at the end of 2012. The staff raised slightly its projection for inflation during the second half of this year, as the upward pressure on consumer prices from earlier increases in import and commodity prices was expected to persist a little longer than previously anticipated. But these influences were still expected to dissipate in coming quarters, as was the temporary upward pressure on motor vehicle prices from low inventories. Moreover, the large increases in consumer energy and food prices seen earlier this year were not expected to be repeated. With long-run inflation expectations stable and substantial slack expected to persist in labor and product markets, the staff continued to expect prices to rise at a subdued pace in 2012. Participants' Views on Current Conditions and the Economic Outlook In their discussion of the economic situation and outlook, meeting participants regarded the information received during the intermeeting period as indicating that economic growth so far this year was considerably slower than they had expected. Participants noted a deterioration in labor market conditions, slower household spending, a drop in consumer and business confidence, and continued weakness in the housing sector. Manufacturing activity was reported to be mixed. Participants judged that temporary factors affecting demand and production, including the damping effect of higher energy and other commodity prices and the supply disruptions from the Japanese earthquake, could account for only some of the weakness in economic growth over the first half of the year. While these effects appeared to be waning, the underlying strength of the economic recovery remained uncertain. In addition, many participants pointed to the recent downward revision to estimates of economic activity over the past three years, and some to the financial market strains seen during the intermeeting period, as contributing to a downgrade of the outlook for the economy. More-over, many participants saw increased downside risks to the outlook for economic growth. Meeting participants generally noted that overall labor market conditions had deteriorated in recent months. While the employment report for July showed that hiring was somewhat better than in previous months, the release was still seen as indicating relatively weak conditions. A couple of participants commented that the exceptionally high level of long-term unemployment could lead to permanent negative effects on the skills and employment prospects of those affected. Another participant, however, noted that it could instead reflect a mismatch between the characteristics of the unemployed and the jobs currently available. Participants also discussed the labor force participation rate, and it was noted that extended unemployment benefits could be increasing the measured unemployment rate by encouraging some workers to remain in the labor force longer than they otherwise would have. Other participants remarked that the declines in the unemployment rate that have occurred over the past year appeared to reflect primarily declines in labor force participation rather than significant gains in employment. Reports from business contacts suggested that depressed business confidence as well as uncertainty regarding the economic outlook, regulatory policy, and fiscal policy continued to restrain hiring and also capital investment. Inflation had moderated in recent months after having been somewhat elevated earlier this year. Transitory factors, including supply chain disruptions from the earthquake in Japan and a surge in energy and other commodity prices, had pushed up both headline and core measures of inflation for a time. More recently, however, as prices of energy and some commodities have declined from their earlier peaks, headline inflation has moderated. Participants generally noted that, with apparently significant slack in labor and product markets, slow wage growth, and little evidence of pricing power among firms, inflation was likely to decline somewhat over time. Measures of inflation expectations had remained stable. Nevertheless, a number of participants noted that core inflation had moved up, on balance, since last fall. Some indicated that the rise in inflation from very low levels reflected the Committee's accommodative stance of monetary policy, which had helped address the deflation risks of a year ago. A couple of others, however, suggested that the juxtaposition of higher core inflation and somewhat lower unemployment could imply that the level of potential output was lower than had been thought. Most meeting participants indicated that the weakness in consumer spending in recent months was unexpected. The flattening out of consumer spending was seen as reflecting, in part, the modest pace of gains in employment and labor income. In addition, household spending on autos had been held back by low inventories, and participants generally expected a pickup in sales of motor vehicles in coming months as production rebounded. Nonetheless, low consumer confidence, efforts to rebuild balance sheets, and heightened caution on the part of households facing an uncertain economic environment were seen as factors likely to continue to weigh on household spending going forward. Several participants also pointed to financial constraints, particularly depressed home prices and still-tight credit conditions, as further restraining consumer spending for a time. Business outlays on equipment and software continued to advance, although at a slower pace than earlier in the year. Business contacts in many parts of the country reported that uncertainty about the pace of growth in coming quarters and a general slump in business confidence had made some firms reluctant to expand capacity. With home prices depressed, housing construction was quite subdued and seen as likely to remain so, while investment in nonresidential structures remained low. The weakness in household and business spending was accompanied by fiscal consolidation at the state and local level. The shedding of state and local government jobs contributed to the deterioration in overall labor market conditions. Some policymakers noted that their outlooks for economic activity were shaped in part by an expectation of fiscal restraint at all levels of government. Participants generally saw the degree of uncertainty surrounding the outlook for economic growth as having risen appreciably. A couple noted that the cyclical impetus to economic expansion appeared to be weaker than it had been in past recoveries, but that the reasons for the weakness were unclear, contributing to greater uncertainty about the economic outlook. Many participants also saw an increase in the downside risks to economic growth. While participants did not anticipate a downturn in economic activity, several noted that, with the recovery still somewhat tentative, the economy was vulnerable to adverse shocks. Potential shocks included the possibility of a more protracted period of weakness in household financial conditions, the chance of a larger-than-expected near-term fiscal tightening, and potential financial and economic spillovers if the situation in Europe were to deteriorate. Participants noted that financial markets were volatile over the intermeeting period, as investors responded to news on the European fiscal situation and the negotiations regarding the debt ceiling in the United States. However, the broad declines in stock prices and interest rates over the intermeeting period were seen as mostly reflecting the incoming data pointing to a weaker outlook for growth both in the United States and globally as well as a reduced willingness of investors to bear risk in light of the greater uncertainty about the outlook. While conditions in funding markets had tightened, it was noted that the condition of U.S. banks had strengthened in recent quarters and that the credit quality of both businesses and households had continued to improve. Participants discussed the range of policy tools available to promote a stronger economic recovery should the Committee judge that providing additional monetary accommodation was warranted. Reinforcing the Committee's forward guidance about the likely path of monetary policy was seen as a possible way to reduce interest rates and provide greater support to the economic expansion; a few participants emphasized that guidance focusing solely on the state of the economy would be preferable to guidance that named specific spans of time or calendar dates. Some participants noted that additional asset purchases could be used to provide more accommodation by lowering longer-term interest rates. Others suggested that increasing the average maturity of the System's portfolio--perhaps by selling securities with relatively short remaining maturities and purchasing securities with relatively long remaining maturities--could have a similar effect on longer-term interest rates. Such an approach would not boost the size of the Federal Reserve's balance sheet and the quantity of reserve balances. A few participants noted that a reduction in the interest rate paid on excess reserve balances could also be helpful in easing financial conditions. In contrast, some participants judged that none of the tools available to the Committee would likely do much to promote a faster economic recovery, either because the headwinds that the economy faced would unwind only gradually and that process could not be accelerated with monetary policy or because recent events had significantly lowered the path of potential output. Consequently, these participants thought that providing additional stimulus at this time would risk boosting inflation without providing a significant gain in output or employment. Participants noted that devoting additional time to discussion of the possible costs and benefits of various potential tools would be useful, and they agreed that the September meeting should be extended to two days in order to provide more time. Committee Policy Action In the discussion of monetary policy for the period ahead, most members agreed that the economic outlook had deteriorated by enough to warrant a Committee response at this meeting. While all felt that monetary policy could not completely address the various strains on the economy, most members thought that it could contribute importantly to better outcomes in terms of the Committee's dual mandate of maximum employment and price stability. In particular, some members expressed the view that additional accommodation was warranted because they expected the unemployment rate to remain well above, and inflation to be at or below, levels consistent with the Committee's mandate. Those viewing a shift toward more accommodative policy as appropriate generally agreed that a strengthening of the Committee's forward guidance regarding the federal funds rate, by being more explicit about the period over which the Committee expected the federal funds rate to remain exceptionally low, would be a measured response to the deterioration in the outlook over the intermeeting period. A few members felt that recent economic developments justified a more substantial move at this meeting, but they were willing to accept the stronger forward guidance as a step in the direction of additional accommodation. Three members dissented because they preferred to retain the forward guidance language employed in the June statement. The Committee agreed to keep the target range for the federal funds rate at 0 to 1/4 percent and to state that economic conditions are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. That anticipated path for the federal funds rate was viewed both as appropriate in light of most members' outlook for the economy and as generally consistent with some prescriptions for monetary policy based on historical and model-based analysis. In choosing to phrase the outlook for policy in terms of a time horizon, members also considered conditioning the outlook for the level of the federal funds rate on explicit numerical values for the unemployment rate or the inflation rate. Some members argued that doing so would establish greater clarity regarding the Committee's intentions and its likely reaction to future economic developments, while others raised questions about how an appropriate numerical value might be chosen. No such references were included in the statement for this meeting. One member expressed concern that the use of a specific date in the forward guidance would be seen by the public as an unconditional commitment, and it could undermine Committee credibility if a change in timing subsequently became appropriate. Most members, however, agreed that stating a conditional expectation for the level of the federal funds rate through mid-2013 provided useful guidance to the public, with some noting that such an indication did not remove the Committee's flexibility to adjust the policy rate earlier or later if economic conditions do not evolve as the Committee currently expects. In the statement to be released following the meeting, members generally agreed that it was important to acknowledge that the recovery had been considerably slower than the Committee had expected. Although some of the slowdown in the first half of the year reflected transitory factors, most members now judged that only part of that weakness could be attributed to those factors. The Committee decided to note that the declines in energy and commodity prices from their recent peaks had led to a moderation of inflation and that longer-term inflation expectations remained stable. The Committee also characterized the economic outlook in terms of its statutory mandate and indicated that it expected the slower pace of economic expansion to result in an unemployment rate that would decline only gradually toward levels consistent with its dual mandate and that it saw the downside risks to the economic outlook as having increased. Most members also anticipated that inflation would settle, over coming quarters, at levels at or below those consistent with the Committee's mandate. The Committee noted that it had discussed the range of policy tools that were available to promote a stronger economic recovery in a context of price stability, and to indicate that those tools, including adjustments to the Committee's securities holdings, would be employed as appropriate. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee also directs the Desk to maintain its existing policy of reinvesting principal payments on all domestic securities in the System Open Market Account in Treasury securities in order to maintain the total face value of domestic securities at approximately $2.6 trillion. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability." The vote encompassed approval of the statement below to be released at 2:15 p.m.: "Information received since the Federal Open Market Committee met in June indicates that economic growth so far this year has been considerably slower than the Committee had expected. Indicators suggest a deterioration in overall labor market conditions in recent months, and the unemployment rate has moved up. Household spending has flattened out, investment in nonresidential structures is still weak, and the housing sector remains depressed. However, business investment in equipment and software continues to expand. Temporary factors, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan, appear to account for only some of the recent weakness in economic activity. Inflation picked up earlier in the year, mainly reflecting higher prices for some commodities and imported goods, as well as the supply chain disruptions. More recently, inflation has moderated as prices of energy and some commodities have declined from their earlier peaks. Longer-term inflation expectations have remained stable. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting and anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, downside risks to the economic outlook have increased. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate further. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations. To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent. The Committee currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate. The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook in light of incoming information and is prepared to employ these tools as appropriate." Voting for this action: Ben Bernanke, William C. Dudley, Elizabeth Duke, Charles L. Evans, Sarah Bloom Raskin, Daniel K. Tarullo, and Janet L. Yellen. Voting against this action: Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser. Messrs. Fisher, Kocherlakota, and Plosser dissented because they would have preferred to continue to describe economic conditions as likely to warrant exceptionally low levels for the federal funds rate for an "extended period," rather than characterizing that period as "at least through mid-2013." Mr. Fisher discussed the fragility of the U.S. economy but felt that it was chiefly nonmonetary factors, such as uncertainty about fiscal and regulatory initiatives, that were restraining domestic capital expenditures, job creation, and economic growth. He was concerned both that the Committee did not have enough information to be specific on the time interval over which it expected low rates to be maintained, and that, were it to do so, the Committee risked appearing overly responsive to the recent financial market volatility. Mr. Kocherlakota's perspective on the policy decision was shaped by his view that in November 2010, the Committee had chosen a level of accommodation that was well calibrated for the condition of the economy. Since November, inflation had risen and unemployment had fallen, and he did not believe that providing more monetary accommodation was the appropriate response to those changes in the economy. Mr. Plosser felt that the reference to 2013 might well be misinterpreted as suggesting that monetary policy was no longer contingent on how the economic outlook evolved. Although financial markets had been volatile and incoming information on growth and employment had been weaker than anticipated, he believed the statement conveyed an excessively negative assessment of the economy and that it was premature to undertake, or be perceived to signal, further policy accommodation. He also judged that the policy step would do little to improve near-term growth prospects, given the ongoing structural adjustments and external challenges faced by the U.S. economy. It was agreed that the next meeting of the Committee would be held on Tuesday–Wednesday, September 20–21, 2011. The meeting adjourned at 1:40 p.m. on August 9, 2011. Videoconference Meeting of August 1 On August 1, 2011, the Committee met by videoconference to discuss issues associated with contingencies in the event that the Treasury was temporarily unable to meet its obligations because the statutory federal debt limit was not raised or in the event of a downgrade of the U.S. sovereign credit rating. The staff provided an update on the debt limit status, conditions in financial markets, plans that the Federal Reserve and the Treasury had developed regarding the processing of federal payments, potential implications for bank supervision and regulatory policies, and possible actions that the Federal Reserve could take if disruptions to market functioning posed a threat to the Federal Reserve's economic objectives. Participants generally anticipated that there would be no need to make changes to existing bank regulations, the operation of the discount window, or the conduct of open market operations. A number of participants emphasized that the Federal Reserve would continue to employ market values of securities in its transactions. With respect to potential policy actions, participants agreed that the appropriate response would depend importantly on the actual conditions in markets and should generally consist of standard operations. Some participants noted that such an approach would maintain the traditional separation of the Federal Reserve's actions from the Treasury's debt management decisions. Notation Vote By notation vote completed on August 29, 2011, the Committee unanimously approved the minutes of the FOMC meeting held on August 9, 2011.   _____________________________ William B. English Secretary Return to top

2011-08-09

Statement

Information received since the Federal Open Market Committee met in June indicates that economic growth so far this year has been considerably slower than the Committee had expected.  Indicators suggest a deterioration in overall labor market conditions in recent months, and the unemployment rate has moved up.  Household spending has flattened out, investment in nonresidential structures is still weak, and the housing sector remains depressed.  However, business investment in equipment and software continues to expand.  Temporary factors, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan, appear to account for only some of the recent weakness in economic activity.  Inflation picked up earlier in the year, mainly reflecting higher prices for some commodities and imported goods, as well as the supply chain disruptions.  More recently, inflation has moderated as prices of energy and some commodities have declined from their earlier peaks.  Longer-term inflation expectations have remained stable. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.  The Committee now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting and anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate.  Moreover, downside risks to the economic outlook have increased. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate further.  However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations. To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent.  The Committee currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.  The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings.  The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate. The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability.  It will continue to assess the economic outlook in light of incoming information and is prepared to employ these tools as appropriate. Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action were: Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, who would have preferred to continue to describe economic conditions as likely to warrant exceptionally low levels for the federal funds rate for an extended period.

N/A

Minute

A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held in the offices of the Board of Governors in Washington, D.C., on Tuesday, August 9, 2011, at 8:00 a.m. PRESENT: Ben Bernanke, Chairman William C. Dudley, Vice Chairman Elizabeth Duke Charles L. Evans Richard W. Fisher Narayana Kocherlakota Charles I. Plosser Sarah Bloom Raskin Daniel K. Tarullo Janet L. Yellen Christine Cumming, Jeffrey M. Lacker, Dennis P. Lockhart, Sandra Pianalto, and John C. Williams, Alternate Members of the Federal Open Market Committee James Bullard, Thomas M. Hoenig, and Eric Rosengren, Presidents of the Federal Reserve Banks of St. Louis, Kansas City, and Boston, respectively William B. English, Secretary and Economist Matthew M. Luecke, Assistant Secretary David W. Skidmore, Assistant Secretary Michelle A. Smith, Assistant Secretary Thomas C. Baxter, Deputy General Counsel Richard M. Ashton, Assistant General Counsel Thomas A. Connors, David Reifschneider, Daniel G. Sullivan, David W. Wilcox, and Kei-Mu Yi, Associate Economists Brian Sack, Manager, System Open Market Account Jennifer J. Johnson, Secretary of the Board, Office of the Secretary, Board of Governors Patrick M. Parkinson, Director, Division of Banking Supervision and Regulation, Board of Governors Robert deV. Frierson, Deputy Secretary, Office of the Secretary, Board of Governors Andreas Lehnert, Deputy Director, Office of Financial Stability Policy and Research, Board of Governors Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors Seth B. Carpenter, Senior Associate Director, Division of Monetary Affairs, Board of Governors; Michael Leahy, Senior Associate Director, Division of International Finance, Board of Governors; Lawrence Slifman and William Wascher, Senior Associate Directors, Division of Research and Statistics, Board of Governors Andrew T. Levin, Senior Adviser, Office of Board Members, Board of Governors; Stephen A. Meyer, Senior Adviser, Division of Monetary Affairs, Board of Governors Joyce K. Zickler, Visiting Senior Adviser, Division of Monetary Affairs, Board of Governors David E. Lebow, Associate Director, Division of Research and Statistics, Board of Governors Joshua Gallin, Deputy Associate Director, Division of Research and Statistics, Board of Governors; Fabio M. Natalucci, Deputy Associate Director, Division of Monetary Affairs, Board of Governors Beth Anne Wilson, Assistant Director, Division of International Finance, Board of Governors Penelope A. Beattie, Assistant to the Secretary, Office of the Secretary, Board of Governors John C. Driscoll, Senior Economist, Division of Monetary Affairs, Board of Governors Carol Low, Open Market Secretariat Specialist, Division of Monetary Affairs, Board of Governors Randall A. Williams, Records Management Analyst, Division of Monetary Affairs, Board of Governors David Sapenaro, First Vice President, Federal Reserve Bank of St. Louis Mark S. Sniderman, Executive Vice President, Federal Reserve Bank of Cleveland David Altig, Alan D. Barkema, and Geoffrey Tootell, Senior Vice Presidents, Federal Reserve Banks of Atlanta, Kansas City, and Boston, respectively Chris Burke, Fred Furlong, Tom Klitgaard, Evan F. Koenig, and Daniel L. Thornton, Vice Presidents, Federal Reserve Banks of New York, San Francisco, New York, Dallas, and St. Louis, respectively Keith Sill, Assistant Vice President, Federal Reserve Bank of Philadelphia Robert L. Hetzel, Senior Economist, Federal Reserve Bank of Richmond Developments in Financial Markets and the Federal Reserve's Balance Sheet The Manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets during the period since the Federal Open Market Committee (FOMC) met on June 21–22, 2011. He also reported on System open market operations, including the continuing reinvestment into longer-term Treasury securities of principal payments received on the SOMA's holdings of agency debt and agency-guaranteed mortgage-backed securities. By unanimous vote, the Committee ratified the transactions by the Open Market Desk of the Federal Reserve Bank of New York over the intermeeting period. Staff Review of the Economic Situation The information reviewed at the August 9 meeting indicated that the pace of the economic recovery remained slow in recent months and that labor market conditions continued to be weak. In addition, revised data for 2008 through 2010 from the Bureau of Economic Analysis indicated that the recent recession was deeper than previously thought and that the level of real gross domestic product (GDP) had not yet attained its pre-recession peak by the second quarter of 2011. Moreover, the downward revision to first-quarter GDP growth and the slow growth reported for the second quarter indicated that the recovery was quite sluggish in the first half of this year. Overall consumer price inflation moderated in recent months, and survey measures of long-run inflation expectations remained stable. Private nonfarm employment rose at a considerably slower pace in June and July than earlier in the year, and employment in state and local governments continued to trend lower. The unemployment rate edged up, on net, since the beginning of the year, and long-duration unemployment remained very high. Meanwhile, the labor force participation rate moved down further through July. Initial claims for unemployment insurance stepped down some in recent weeks but remained elevated, and indicators of hiring showed no improvement. Manufacturing production was unchanged in June. Supply chain disruptions associated with the earthquake in Japan continued to hinder production at motor vehicle manufacturers and the firms that supply them. Excluding motor vehicles and parts, factory output posted only a modest increase. The manufacturing capacity utilization rate held about flat in recent months. With auto manufacturers expecting supply chain disruptions to ease, motor vehicle assembly schedules called for a substantial step-up in production in the third quarter, and initial estimates of production in June were consistent with such a step-up. But broader indicators of near-term manufacturing activity, such as the diffusion indexes of new orders from the national and regional manufacturing surveys, softened to levels consistent with only small gains in production in the coming months. Real consumer spending was nearly unchanged in the second quarter. Motor vehicle purchases declined during the spring when the availability of some models was limited, but rebounded somewhat in July as supplies improved. Consumer spending on goods and services other than motor vehicles also appeared soft through June. Labor earnings rose in the second quarter, but increases in consumer prices offset much of the gain in nominal income. Consumer sentiment weakened markedly in July, and the Thomson Reuters/University of Michigan sentiment index fell to levels last seen in early 2009. The housing market remained depressed. Although single-family housing starts moved up some in June, permit issuance stayed low. Similarly, sales of new and existing single-family homes were subdued in recent months, and home prices continued to trend lower. New construction remained constrained by the overhang of foreclosed or distressed properties as well as by weak demand in an environment of uncertainty about future home prices and tight underwriting standards for mortgage loans. Real business spending on equipment and software rose at a modest pace in the second quarter, reflecting strong increases in outlays for high-tech equipment that more than offset declines in spending in many other equipment categories. Nominal new orders for nondefense capital goods excluding aircraft continued to rise through June, and orders remained well above shipments, suggesting further gains in outlays for equipment and software in the near term. However, indicators of business conditions and sentiment weakened in June and July. Business investment in nonresidential structures appeared to have stabilized at a low level in recent months, with vacancy rates elevated and construction financing conditions still tight. Outlays for drilling and mining equipment continued to increase. In the second quarter, businesses appeared to add to inventories at a moderate rate, as a drawdown in motor vehicle inventories associated with production disruptions was offset by higher accumulation elsewhere. In most industries outside of the motor vehicle sector, inventories seemed to be reasonably well aligned with sales. Real federal purchases turned up in the second quarter, as defense expenditures rebounded after declining noticeably in the preceding quarter. At the state and local level, real purchases continued to decline in response to budgetary pressures; these governments continued to reduce payrolls, and their real construction outlays fell sharply. The U.S. international trade deficit widened significantly in May in nominal terms, as exports edged down and imports moved up strongly. Declines in exports were concentrated in commodity-intensive categories such as industrial supplies and agricultural goods; sales of capital goods and automotive products increased. The rise in imports importantly reflected increases in spending on petroleum products (mainly the result of higher prices rather than increased volumes) and on capital goods, especially computers. For the second quarter as a whole, the advance release of the National Income and Product Accounts (NIPA) indicated that real exports of goods and services increased more than real imports, with the result that net exports added significantly to real GDP growth. After decelerating in the preceding two months, indexes of U.S. consumer prices declined in June, reflecting a substantial drop in consumer energy prices. However, survey data indicated some backup in gasoline prices in July. The price index for personal consumption expenditures (PCE) excluding food and energy posted a small increase in June, and the PCE price index for non-energy services was essentially unchanged. In contrast, prices of nonfood, non-energy goods were apparently boosted by upward pressure from earlier increases in commodity and import prices, and motor vehicle prices rose further, reflecting the extremely low levels of vehicle inventories. Near-term expected inflation from the Thomson Reuters/University of Michigan Surveys of Consumers moved down again in July from its elevated level in the spring, and longer-term inflation expectations remained stable. Nominal hourly labor compensation, as measured both by compensation per hour in the nonfarm business sector and by the employment cost index, increased at a moderate rate over the year ending in the second quarter. Similarly, the 12-month change in average hourly earnings of all employees remained moderate in July. Productivity in the nonfarm business sector rose only slightly over the past four-quarter period, so unit labor costs posted a modest increase. Foreign economic growth appeared to have slowed significantly in recent months. Real GDP growth declined sharply in the United Kingdom in the second quarter, and industrial production data and purchasing managers surveys pointed to a similar slowdown in Canada. Retail sales and business sentiment for the euro area also weakened in recent months amid intensified concerns over the fiscal situation of the peripheral euro-area countries. Economic performance in the emerging market economies was somewhat better, but indicators for those economies also suggested some cooling from the very rapid growth earlier this year. By contrast, the Japanese economy has begun to recover from the March disaster, with exports and production both retracing much of their substantial losses. Foreign inflation dipped in the second quarter as the effects of previous increases in food and energy prices began to dissipate. Staff Review of the Financial Situation Over the intermeeting period, U.S. financial markets were strongly influenced by developments regarding the fiscal situations in the United States and in Europe and by generally weaker-than-expected readings on economic activity. Throughout the period, waxing and waning concerns about the sovereign debt of peripheral euro-area countries appeared to have an effect on investor appetite for risk, leading to volatility in many asset markets. Late in the period, investor focus appeared to turn to the U.S. debt ceiling and the potential for delayed debt service payments by the Treasury Department, the possibility of a downgrade of U.S. sovereign debt, and the prospects for significant long-term fiscal consolidation. Liquidity and funding in money markets deteriorated in the last week of July, and interest rates on a number of short-term funding instruments increased markedly. The strains in these markets eased after legislation to raise the debt ceiling and to cut the federal budget deficit was signed into law on August 2. U.S. equity prices fell considerably in the last week of July and the first week of August, reportedly reflecting recent weaker-than-expected economic data releases, and they declined further after the August 5 announcement by Standard & Poor's of its downgrade of long-term U.S. sovereign debt. The decisions by the FOMC at its June meeting to complete its asset purchase program and to maintain the 0 to 1/4 percent target range for the federal funds rate were about in line with market expectations and elicited little market reaction; the same was true of the accompanying statement and the subsequent press briefing by the Chairman. Over the intermeeting period, investors marked down the expected path for the federal funds rate substantially, reflecting incoming economic data that were weaker than expected and concomitant concerns about the prospects for global growth. Yields on nominal Treasury securities also fell notably, on net, over the intermeeting period. The Federal Reserve's Treasury purchase program was completed on schedule on June 30. Broad U.S. stock price indexes fell sharply, on net, over the intermeeting period, as increased concerns about economic growth appeared to overshadow generally strong second-quarter corporate earnings reports. Option-implied volatility on the S&P 500 index jumped late in the period. Yields on both investment- and speculative-grade corporate bonds fell a little less than those on comparable-maturity Treasury securities, leaving risk spreads wider. Financial market indicators of inflation expectations were mixed over the intermeeting period. Net debt financing by nonfinancial corporations was solid in July, although below the elevated pace posted in the second quarter. Gross bond issuance fell, and the outstanding amount of commercial and industrial (C&I) loans on banks' books was about flat. Nonfinancial commercial paper (CP) posted a sizable gain. The market for CP issued by financial firms experienced some strains late in the period as institutional money market mutual funds reportedly increased their cash positions and sought to decrease exposure to CP issued by some entities perceived to be less creditworthy. Issuance of syndicated leveraged loans remained strong in the second quarter. The pace of gross public equity issuance by nonfinancial firms fell somewhat in July from its solid pace in the second quarter. Most indicators of business credit quality continued to improve. Commercial real estate markets remained weak. Available data for the second quarter indicated that commercial mortgage debt contracted, prices of commercial properties were generally depressed, and issuance of commercial mortgage-backed securities (CMBS) slowed. However, the delinquency rate in June for loans that back existing CMBS stayed below its recent peak, and vacancy rates for commercial properties, while still high, generally continued to edge lower. Rates on conforming fixed-rate residential mortgages declined, on net, over the intermeeting period. Mortgage refinancing activity picked up but remained relatively subdued. Outstanding residential mortgage debt is estimated to have contracted further in the second quarter. Rates of serious mortgage delinquency continued to moderate but remained high, while the rate of new delinquencies on prime mortgages flattened out in recent months at an elevated level. Conditions in consumer credit markets generally continued to improve. Total consumer credit expanded at a moderate rate in May as both nonrevolving and revolving credit posted gains. Issuance of consumer asset-backed securities remained solid in July, although some deals later in the month were reportedly postponed a few days while issuers awaited the outcome of the debt ceiling deliberations. Delinquency rates for most types of consumer loans moved down in recent months. Core commercial bank loans--the sum of C&I, real estate, and consumer loans--were about flat over the months of June and July, as a slowdown in lending to businesses was offset by a pickup in loans to households. The July Senior Loan Officer Opinion Survey on Bank Lending Practices showed that respondents again eased lending standards to some degree on all major loan types other than residential real estate loans. Nonetheless, banks also indicated that the current levels of their lending standards for all loan types were between moderate and relatively tight when compared with the range of standards that had prevailed since 2005. Nearly all second-quarter earnings reports from large banking companies exceeded expectations. M2 expanded rapidly in June and July. Liquid deposits, the largest component of M2, increased robustly, likely reflecting safe-haven flows from riskier assets along with temporary increases in the amount of deposits that money market mutual funds held at their custodian banks. The rise in currency moderated over those two months but remained robust. Headline equity indexes abroad and foreign benchmark sovereign yields declined over the intermeeting period in apparent response to signs of a slowdown in the pace of global economic activity and reduced demand for risky assets. At the same time, concerns about fiscal deficits and debt sustainability drove yields on the sovereign debt of Greece, Ireland, Portugal, Spain, and Italy to record highs relative to yields on German bunds, although later in the period, spreads fell back somewhat. Stock prices of European banks, which are significant investors in sovereign bonds issued by the peripheral euro-area countries, declined appreciably, and some of these banks reportedly faced tighter funding conditions toward the end of the intermeeting period. The broad nominal index of the U.S. dollar fluctuated over the period in response to changes in investors' assessment of the outlook for the U.S. economy, prospects for the lifting of the U.S. debt ceiling, and the situation in the European economies. On net over the intermeeting period, the dollar rose modestly after having depreciated earlier this year. The European Central Bank (ECB) boosted its policy rate in July, a move that was widely anticipated. As indicated by money market futures quotes, however, the expected pace of monetary policy tightening declined substantially for the ECB as well as for other central banks in advanced foreign economies. Following its August meeting, the ECB expanded and extended its offerings of term liquidity and resumed purchases of sovereign debt in the secondary market. Central banks in several emerging market economies, including China, continued to tighten policy in response to inflationary pressures. Authorities in some emerging market economies also took measures to limit capital inflows and credit growth. Staff Economic Outlook The information on economic activity received since the June FOMC meeting was weaker than the staff had anticipated, and the projection for real GDP growth in the second half of 2011 and in 2012 was marked down notably. Moreover, the lower estimates of real GDP in recent years that were contained in the annual revisions to the NIPA led the staff to lower its estimate of potential GDP growth, both during recent years and over the forecast period, and to mark down further the staff forecast. The staff continued to expect some rebound in economic activity in the near term as the Japan-related supply chain disruptions in the motor vehicle sector eased. More generally, the staff still projected real GDP to accelerate gradually over the next year and a half, supported by accommodative monetary policy, improved credit availability, and a pickup in consumer and business sentiment. However, the increase in real GDP was projected to be sufficient to reduce slack in the labor market only slowly, and the unemployment rate was expected to remain elevated at the end of 2012. The staff raised slightly its projection for inflation during the second half of this year, as the upward pressure on consumer prices from earlier increases in import and commodity prices was expected to persist a little longer than previously anticipated. But these influences were still expected to dissipate in coming quarters, as was the temporary upward pressure on motor vehicle prices from low inventories. Moreover, the large increases in consumer energy and food prices seen earlier this year were not expected to be repeated. With long-run inflation expectations stable and substantial slack expected to persist in labor and product markets, the staff continued to expect prices to rise at a subdued pace in 2012. Participants' Views on Current Conditions and the Economic Outlook In their discussion of the economic situation and outlook, meeting participants regarded the information received during the intermeeting period as indicating that economic growth so far this year was considerably slower than they had expected. Participants noted a deterioration in labor market conditions, slower household spending, a drop in consumer and business confidence, and continued weakness in the housing sector. Manufacturing activity was reported to be mixed. Participants judged that temporary factors affecting demand and production, including the damping effect of higher energy and other commodity prices and the supply disruptions from the Japanese earthquake, could account for only some of the weakness in economic growth over the first half of the year. While these effects appeared to be waning, the underlying strength of the economic recovery remained uncertain. In addition, many participants pointed to the recent downward revision to estimates of economic activity over the past three years, and some to the financial market strains seen during the intermeeting period, as contributing to a downgrade of the outlook for the economy. More-over, many participants saw increased downside risks to the outlook for economic growth. Meeting participants generally noted that overall labor market conditions had deteriorated in recent months. While the employment report for July showed that hiring was somewhat better than in previous months, the release was still seen as indicating relatively weak conditions. A couple of participants commented that the exceptionally high level of long-term unemployment could lead to permanent negative effects on the skills and employment prospects of those affected. Another participant, however, noted that it could instead reflect a mismatch between the characteristics of the unemployed and the jobs currently available. Participants also discussed the labor force participation rate, and it was noted that extended unemployment benefits could be increasing the measured unemployment rate by encouraging some workers to remain in the labor force longer than they otherwise would have. Other participants remarked that the declines in the unemployment rate that have occurred over the past year appeared to reflect primarily declines in labor force participation rather than significant gains in employment. Reports from business contacts suggested that depressed business confidence as well as uncertainty regarding the economic outlook, regulatory policy, and fiscal policy continued to restrain hiring and also capital investment. Inflation had moderated in recent months after having been somewhat elevated earlier this year. Transitory factors, including supply chain disruptions from the earthquake in Japan and a surge in energy and other commodity prices, had pushed up both headline and core measures of inflation for a time. More recently, however, as prices of energy and some commodities have declined from their earlier peaks, headline inflation has moderated. Participants generally noted that, with apparently significant slack in labor and product markets, slow wage growth, and little evidence of pricing power among firms, inflation was likely to decline somewhat over time. Measures of inflation expectations had remained stable. Nevertheless, a number of participants noted that core inflation had moved up, on balance, since last fall. Some indicated that the rise in inflation from very low levels reflected the Committee's accommodative stance of monetary policy, which had helped address the deflation risks of a year ago. A couple of others, however, suggested that the juxtaposition of higher core inflation and somewhat lower unemployment could imply that the level of potential output was lower than had been thought. Most meeting participants indicated that the weakness in consumer spending in recent months was unexpected. The flattening out of consumer spending was seen as reflecting, in part, the modest pace of gains in employment and labor income. In addition, household spending on autos had been held back by low inventories, and participants generally expected a pickup in sales of motor vehicles in coming months as production rebounded. Nonetheless, low consumer confidence, efforts to rebuild balance sheets, and heightened caution on the part of households facing an uncertain economic environment were seen as factors likely to continue to weigh on household spending going forward. Several participants also pointed to financial constraints, particularly depressed home prices and still-tight credit conditions, as further restraining consumer spending for a time. Business outlays on equipment and software continued to advance, although at a slower pace than earlier in the year. Business contacts in many parts of the country reported that uncertainty about the pace of growth in coming quarters and a general slump in business confidence had made some firms reluctant to expand capacity. With home prices depressed, housing construction was quite subdued and seen as likely to remain so, while investment in nonresidential structures remained low. The weakness in household and business spending was accompanied by fiscal consolidation at the state and local level. The shedding of state and local government jobs contributed to the deterioration in overall labor market conditions. Some policymakers noted that their outlooks for economic activity were shaped in part by an expectation of fiscal restraint at all levels of government. Participants generally saw the degree of uncertainty surrounding the outlook for economic growth as having risen appreciably. A couple noted that the cyclical impetus to economic expansion appeared to be weaker than it had been in past recoveries, but that the reasons for the weakness were unclear, contributing to greater uncertainty about the economic outlook. Many participants also saw an increase in the downside risks to economic growth. While participants did not anticipate a downturn in economic activity, several noted that, with the recovery still somewhat tentative, the economy was vulnerable to adverse shocks. Potential shocks included the possibility of a more protracted period of weakness in household financial conditions, the chance of a larger-than-expected near-term fiscal tightening, and potential financial and economic spillovers if the situation in Europe were to deteriorate. Participants noted that financial markets were volatile over the intermeeting period, as investors responded to news on the European fiscal situation and the negotiations regarding the debt ceiling in the United States. However, the broad declines in stock prices and interest rates over the intermeeting period were seen as mostly reflecting the incoming data pointing to a weaker outlook for growth both in the United States and globally as well as a reduced willingness of investors to bear risk in light of the greater uncertainty about the outlook. While conditions in funding markets had tightened, it was noted that the condition of U.S. banks had strengthened in recent quarters and that the credit quality of both businesses and households had continued to improve. Participants discussed the range of policy tools available to promote a stronger economic recovery should the Committee judge that providing additional monetary accommodation was warranted. Reinforcing the Committee's forward guidance about the likely path of monetary policy was seen as a possible way to reduce interest rates and provide greater support to the economic expansion; a few participants emphasized that guidance focusing solely on the state of the economy would be preferable to guidance that named specific spans of time or calendar dates. Some participants noted that additional asset purchases could be used to provide more accommodation by lowering longer-term interest rates. Others suggested that increasing the average maturity of the System's portfolio--perhaps by selling securities with relatively short remaining maturities and purchasing securities with relatively long remaining maturities--could have a similar effect on longer-term interest rates. Such an approach would not boost the size of the Federal Reserve's balance sheet and the quantity of reserve balances. A few participants noted that a reduction in the interest rate paid on excess reserve balances could also be helpful in easing financial conditions. In contrast, some participants judged that none of the tools available to the Committee would likely do much to promote a faster economic recovery, either because the headwinds that the economy faced would unwind only gradually and that process could not be accelerated with monetary policy or because recent events had significantly lowered the path of potential output. Consequently, these participants thought that providing additional stimulus at this time would risk boosting inflation without providing a significant gain in output or employment. Participants noted that devoting additional time to discussion of the possible costs and benefits of various potential tools would be useful, and they agreed that the September meeting should be extended to two days in order to provide more time. Committee Policy Action In the discussion of monetary policy for the period ahead, most members agreed that the economic outlook had deteriorated by enough to warrant a Committee response at this meeting. While all felt that monetary policy could not completely address the various strains on the economy, most members thought that it could contribute importantly to better outcomes in terms of the Committee's dual mandate of maximum employment and price stability. In particular, some members expressed the view that additional accommodation was warranted because they expected the unemployment rate to remain well above, and inflation to be at or below, levels consistent with the Committee's mandate. Those viewing a shift toward more accommodative policy as appropriate generally agreed that a strengthening of the Committee's forward guidance regarding the federal funds rate, by being more explicit about the period over which the Committee expected the federal funds rate to remain exceptionally low, would be a measured response to the deterioration in the outlook over the intermeeting period. A few members felt that recent economic developments justified a more substantial move at this meeting, but they were willing to accept the stronger forward guidance as a step in the direction of additional accommodation. Three members dissented because they preferred to retain the forward guidance language employed in the June statement. The Committee agreed to keep the target range for the federal funds rate at 0 to 1/4 percent and to state that economic conditions are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. That anticipated path for the federal funds rate was viewed both as appropriate in light of most members' outlook for the economy and as generally consistent with some prescriptions for monetary policy based on historical and model-based analysis. In choosing to phrase the outlook for policy in terms of a time horizon, members also considered conditioning the outlook for the level of the federal funds rate on explicit numerical values for the unemployment rate or the inflation rate. Some members argued that doing so would establish greater clarity regarding the Committee's intentions and its likely reaction to future economic developments, while others raised questions about how an appropriate numerical value might be chosen. No such references were included in the statement for this meeting. One member expressed concern that the use of a specific date in the forward guidance would be seen by the public as an unconditional commitment, and it could undermine Committee credibility if a change in timing subsequently became appropriate. Most members, however, agreed that stating a conditional expectation for the level of the federal funds rate through mid-2013 provided useful guidance to the public, with some noting that such an indication did not remove the Committee's flexibility to adjust the policy rate earlier or later if economic conditions do not evolve as the Committee currently expects. In the statement to be released following the meeting, members generally agreed that it was important to acknowledge that the recovery had been considerably slower than the Committee had expected. Although some of the slowdown in the first half of the year reflected transitory factors, most members now judged that only part of that weakness could be attributed to those factors. The Committee decided to note that the declines in energy and commodity prices from their recent peaks had led to a moderation of inflation and that longer-term inflation expectations remained stable. The Committee also characterized the economic outlook in terms of its statutory mandate and indicated that it expected the slower pace of economic expansion to result in an unemployment rate that would decline only gradually toward levels consistent with its dual mandate and that it saw the downside risks to the economic outlook as having increased. Most members also anticipated that inflation would settle, over coming quarters, at levels at or below those consistent with the Committee's mandate. The Committee noted that it had discussed the range of policy tools that were available to promote a stronger economic recovery in a context of price stability, and to indicate that those tools, including adjustments to the Committee's securities holdings, would be employed as appropriate. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee also directs the Desk to maintain its existing policy of reinvesting principal payments on all domestic securities in the System Open Market Account in Treasury securities in order to maintain the total face value of domestic securities at approximately $2.6 trillion. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability." The vote encompassed approval of the statement below to be released at 2:15 p.m.: "Information received since the Federal Open Market Committee met in June indicates that economic growth so far this year has been considerably slower than the Committee had expected. Indicators suggest a deterioration in overall labor market conditions in recent months, and the unemployment rate has moved up. Household spending has flattened out, investment in nonresidential structures is still weak, and the housing sector remains depressed. However, business investment in equipment and software continues to expand. Temporary factors, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan, appear to account for only some of the recent weakness in economic activity. Inflation picked up earlier in the year, mainly reflecting higher prices for some commodities and imported goods, as well as the supply chain disruptions. More recently, inflation has moderated as prices of energy and some commodities have declined from their earlier peaks. Longer-term inflation expectations have remained stable. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting and anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, downside risks to the economic outlook have increased. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate further. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations. To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent. The Committee currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate. The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook in light of incoming information and is prepared to employ these tools as appropriate." Voting for this action: Ben Bernanke, William C. Dudley, Elizabeth Duke, Charles L. Evans, Sarah Bloom Raskin, Daniel K. Tarullo, and Janet L. Yellen. Voting against this action: Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser. Messrs. Fisher, Kocherlakota, and Plosser dissented because they would have preferred to continue to describe economic conditions as likely to warrant exceptionally low levels for the federal funds rate for an "extended period," rather than characterizing that period as "at least through mid-2013." Mr. Fisher discussed the fragility of the U.S. economy but felt that it was chiefly nonmonetary factors, such as uncertainty about fiscal and regulatory initiatives, that were restraining domestic capital expenditures, job creation, and economic growth. He was concerned both that the Committee did not have enough information to be specific on the time interval over which it expected low rates to be maintained, and that, were it to do so, the Committee risked appearing overly responsive to the recent financial market volatility. Mr. Kocherlakota's perspective on the policy decision was shaped by his view that in November 2010, the Committee had chosen a level of accommodation that was well calibrated for the condition of the economy. Since November, inflation had risen and unemployment had fallen, and he did not believe that providing more monetary accommodation was the appropriate response to those changes in the economy. Mr. Plosser felt that the reference to 2013 might well be misinterpreted as suggesting that monetary policy was no longer contingent on how the economic outlook evolved. Although financial markets had been volatile and incoming information on growth and employment had been weaker than anticipated, he believed the statement conveyed an excessively negative assessment of the economy and that it was premature to undertake, or be perceived to signal, further policy accommodation. He also judged that the policy step would do little to improve near-term growth prospects, given the ongoing structural adjustments and external challenges faced by the U.S. economy. It was agreed that the next meeting of the Committee would be held on Tuesday–Wednesday, September 20–21, 2011. The meeting adjourned at 1:40 p.m. on August 9, 2011. Videoconference Meeting of August 1 On August 1, 2011, the Committee met by videoconference to discuss issues associated with contingencies in the event that the Treasury was temporarily unable to meet its obligations because the statutory federal debt limit was not raised or in the event of a downgrade of the U.S. sovereign credit rating. The staff provided an update on the debt limit status, conditions in financial markets, plans that the Federal Reserve and the Treasury had developed regarding the processing of federal payments, potential implications for bank supervision and regulatory policies, and possible actions that the Federal Reserve could take if disruptions to market functioning posed a threat to the Federal Reserve's economic objectives. Participants generally anticipated that there would be no need to make changes to existing bank regulations, the operation of the discount window, or the conduct of open market operations. A number of participants emphasized that the Federal Reserve would continue to employ market values of securities in its transactions. With respect to potential policy actions, participants agreed that the appropriate response would depend importantly on the actual conditions in markets and should generally consist of standard operations. Some participants noted that such an approach would maintain the traditional separation of the Federal Reserve's actions from the Treasury's debt management decisions. Notation Vote By notation vote completed on August 29, 2011, the Committee unanimously approved the minutes of the FOMC meeting held on August 9, 2011.   _____________________________ William B. English Secretary Return to top

2011-07-12

Minute

A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held in the offices of the Board of Governors in Washington, D.C., on Tuesday, June 21, 2011, at 10:30 a.m. and continued on Wednesday, June 22, 2011, at 9:00 a.m. PRESENT: Ben Bernanke, Chairman William C. Dudley, Vice Chairman Elizabeth Duke Charles L. Evans Richard W. Fisher Narayana Kocherlakota Charles I. Plosser Sarah Bloom Raskin Daniel K. Tarullo Janet L. Yellen Jeffrey M. Lacker, Dennis P. Lockhart, Sandra Pianalto, and John C. Williams, Alternate Members of the Federal Open Market Committee James Bullard, Thomas M. Hoenig, and Eric Rosengren, Presidents of the Federal Reserve Banks of St. Louis, Kansas City, and Boston, respectively William B. English, Secretary and Economist Deborah J. Danker, Deputy Secretary Matthew M. Luecke, Assistant Secretary David W. Skidmore, Assistant Secretary Michelle A. Smith, Assistant Secretary Scott G. Alvarez, General Counsel David J. Stockton, Economist James A. Clouse, Thomas A. Connors, Steven B. Kamin, Loretta J. Mester, David Reifschneider, Harvey Rosenblum, Daniel G. Sullivan, David W. Wilcox, and Kei-Mu Yi, Associate Economists Brian Sack, Manager, System Open Market Account Jennifer J. Johnson, Secretary of the Board, Office of the Secretary, Board of Governors Nellie Liang, Director, Office of Financial Stability Policy and Research, Board of Governors Robert deV. Frierson, Deputy Secretary, Office of the Secretary, Board of Governors William Nelson, Deputy Director, Division of Monetary Affairs, Board of Governors Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors Charles S. Struckmeyer, Deputy Staff Director, Office of the Staff Director, Board of Governors Seth B. Carpenter, Senior Associate Director, Division of Monetary Affairs, Board of Governors; Michael Foley, Senior Associate Director, Division of Banking Supervision and Regulation, Board of Governors; Lawrence Slifman and William Wascher, Senior Associate Directors, Division of Research and Statistics, Board of Governors Andrew T. Levin, Senior Adviser, Office of Board Members, Board of Governors Joyce K. Zickler, Visiting Senior Adviser, Division of Monetary Affairs, Board of Governors Daniel M. Covitz and Eric M. Engen, Associate Directors, Division of Research and Statistics, Board of Governors; Trevor A. Reeve, Associate Director, Division of International Finance, Board of Governors Egon Zakrajsek, Deputy Associate Director, Division of Monetary Affairs, Board of Governors Beth Anne Wilson, Assistant Director, Division of International Finance, Board of Governors David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors Brahima Coulibaly, Senior Economist, Division of International Finance, Board of Governors; Louise Sheiner, Senior Economist, Division of Research and Statistics, Board of Governors Jean-Philippe Laforte,1 Economist, Division of Research and Statistics, Board of Governors Penelope A. Beattie, Assistant to the Secretary, Office of the Secretary, Board of Governors Randall A. Williams, Records Management Analyst, Division of Monetary Affairs, Board of Governors Jeff Fuhrer, Executive Vice President, Federal Reserve Bank of Boston David Altig, Glenn D. Rudebusch, and Mark E. Schweitzer, Senior Vice Presidents, Federal Reserve Banks of Atlanta, San Francisco, and Cleveland, respectively Michael Dotsey,1 William Gavin, Andreas L. Hornstein, and Edward S. Knotek II, Vice Presidents, Federal Reserve Banks of Philadelphia, St. Louis, Richmond, and Kansas City, respectively Marco Del Negro,1 Joshua L. Frost, Deborah L. Leonard, and Jonathan P. McCarthy, Assistant Vice Presidents, Federal Reserve Bank of New York Jeff Campbell,1 Senior Economist, Federal Reserve Bank of Chicago Developments in Financial Markets and the Federal Reserve's Balance Sheet The manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets during the period since the Federal Open Market Committee (FOMC) met on April 26-27, 2011. He also reported on System open market operations, including the continuing reinvestment into longer-term Treasury securities of principal payments received on the SOMA's holdings of agency debt and agency-guaranteed mortgage-backed securities, as well as the ongoing purchases of additional Treasury securities authorized at the November 2-3, 2010, FOMC meeting. Since November, purchases by the Open Market Desk of the Federal Reserve Bank of New York had increased the SOMA's holdings by nearly the full $600 billion authorized. In light of ongoing strains in some foreign financial markets, the Committee considered a proposal to extend its dollar liquidity swap arrangements with foreign central banks past August 1, 2011. Following their discussion, members unanimously approved the following resolution: The Federal Open Market Committee directs the Federal Reserve Bank of New York to extend the existing temporary reciprocal currency arrangements ("swap arrangements") for the System Open Market Account with the Bank of Canada, the Bank of England, the European Central Bank, the Bank of Japan, and the Swiss National Bank. The swap arrangements shall now terminate on August 1, 2012, unless further extended by the Committee. Dynamic Stochastic General Equilibrium Models A staff presentation provided an overview of ongoing Federal Reserve research on dynamic stochastic general equilibrium (DSGE) models. DSGE models attempt to capture the dynamics of the overall economy in a way that is consistent both with the historical data and with optimizing behavior by forward-looking households and firms. The presentation began by discussing the general features of DSGE models and considering their advantages and limitations relative to other approaches of analyzing macroeconomic dynamics; with regard to the latter, the presentation noted that while the current generation of DSGE models is still somewhat limited in the range of policy issues these models can address, further advances in modeling should increase the usefulness of DSGE models for forecasting and policy analysis. The presentation then reviewed some specific features of DSGE models that are currently being studied at the Federal Reserve Board and the Federal Reserve Banks of New York, Philadelphia, and Chicago. This review included the four models' characterizations of the forces affecting the economy in recent years and the models' current forecasts for real economic activity, inflation, and short-term interest rates. In discussing the staff presentation, meeting participants expressed the view that DSGE models are a useful addition to the wide range of analytical approaches traditionally used at the Federal Reserve, in part because they provide an internally consistent way of exploring how the behavior of economic agents might change in response to systematic adjustments to policy. Some participants also expressed interest in seeing on a regular basis projections of key macroeconomic variables and other products from the DSGE models developed in the System. Finally, participants encouraged further staff work to improve these models by, for example, expanding the range of questions they can be used to address. Exit Strategy Principles The Committee discussed strategies for normalizing the stance and conduct of monetary policy, following up on its discussion of this topic at the April meeting. Participants stressed that the Committee's discussions of this topic were undertaken as part of prudent planning and did not imply that a move toward such normalization would necessarily begin sometime soon. For concreteness, the Committee considered a set of specific principles that would guide its strategy of normalizing the stance and conduct of monetary policy. Participants discussed several specific elements of the principles, including how they should characterize the monetary policy framework that the Committee would adopt after the conduct of policy returned to normal and whether the principles should encompass the possible timing between the normalization steps. At the conclusion of the discussion, all but one of the participants agreed on the following key elements of the strategy that they expect to follow when it becomes appropriate to begin normalizing the stance and conduct of monetary policy: The Committee will determine the timing and pace of policy normalization to promote its statutory mandate of maximum employment and price stability. To begin the process of policy normalization, the Committee will likely first cease reinvesting some or all payments of principal on the securities holdings in the SOMA. At the same time or sometime thereafter, the Committee will modify its forward guidance on the path of the federal funds rate and will initiate temporary reserve-draining operations aimed at supporting the implementation of increases in the federal funds rate when appropriate. When economic conditions warrant, the Committee's next step in the process of policy normalization will be to begin raising its target for the federal funds rate, and from that point on, changing the level or range of the federal funds rate target will be the primary means of adjusting the stance of monetary policy. During the normalization process, adjustments to the interest rate on excess reserves and to the level of reserves in the banking system will be used to bring the funds rate toward its target. Sales of agency securities from the SOMA will likely commence sometime after the first increase in the target for the federal funds rate. The timing and pace of sales will be communicated to the public in advance; that pace is anticipated to be relatively gradual and steady, but it could be adjusted up or down in response to material changes in the economic outlook or financial conditions. Once sales begin, the pace of sales is expected to be aimed at eliminating the SOMA's holdings of agency securities over a period of three to five years, thereby minimizing the extent to which the SOMA portfolio might affect the allocation of credit across sectors of the economy. Sales at this pace would be expected to normalize the size of the SOMA securities portfolio over a period of two to three years. In particular, the size of the securities portfolio and the associated quantity of bank reserves are expected to be reduced to the smallest levels that would be consistent with the efficient implementation of monetary policy. The Committee is prepared to make adjustments to its exit strategy if necessary in light of economic and financial developments. Staff Review of the Economic Situation The information reviewed at the June 21-22 meeting indicated that the pace of the economic recovery slowed in recent months and that conditions in the labor market had softened. Measures of inflation picked up this year, reflecting in part higher prices for some commodities and imported goods. Longer-run inflation expectations, however, remained stable. The expansion of private nonfarm payroll employment in May was markedly below the average pace of job gains in the previous months of this year. Initial claims for unemployment insurance rose, on net, between the first half of April and the first half of June. The unemployment rate moved up in April and then rose further to 9.1 percent in May, while the labor force participation rate remained unchanged. Both long-duration unemployment and the share of workers employed part time for economic reasons continued to be elevated. Total industrial production expanded only a bit during April and May after rising at a solid pace in the first quarter. Shortages of specialized components imported from Japan contributed to a decline in the output of motor vehicles and parts. Manufacturing production outside of the motor vehicles sector increased moderately, on balance, during the past two months. The manufacturing capacity utilization rate remained close to its first-quarter level, but it was still well below its longer-run average. Forward-looking indicators of industrial activity, such as the new orders diffusion indexes in the national and regional manufacturing surveys, weakened noticeably during the intermeeting period to levels consistent with only tepid gains in factory output in coming months. However, motor vehicle assemblies were scheduled to rise notably in the third quarter from their levels in recent months, as bottlenecks in parts supplies were anticipated to ease. Growth in consumer spending declined in recent months from the already modest pace in the first quarter. Total real personal consumption expenditures only edged up in April. Nominal retail sales, excluding purchases at motor vehicles and parts outlets, increased somewhat in May, but sales of new light motor vehicles declined markedly. Labor income rose moderately, as aggregate hours worked trended up, but total real disposable income remained flat in March and April, as increases in consumer prices offset gains in nominal income. In addition, consumer sentiment stayed relatively low through early June. Activity in the housing market remained depressed, as both weak demand and the sizable inventory of foreclosed or distressed properties continued to hold back new construction. Starts and permits of new single-family homes were essentially unchanged in April and May, and they stayed near the very low levels seen since the middle of last year. Sales of new and existing homes remained at subdued levels in recent months, while measures of home prices fell further. The available indicators suggested that real business investment in equipment and software was rising a bit more slowly in the second quarter than the solid pace seen in the first quarter. Nominal orders and shipments of nondefense capital goods declined in April. Business purchases of light motor vehicles edged up in April but dropped in May, while spending for medium and heavy trucks continued to increase in recent months. Survey measures of business conditions and sentiment weakened during the intermeeting period. Business expenditures for office and commercial buildings remained depressed by elevated vacancy rates, low prices for commercial real estate, and tight credit conditions for construction loans. In contrast, outlays for drilling and mining structures continued to be lifted by high energy prices. Real nonfarm inventory investment rose moderately in the first quarter, but data for April suggested that the pace of inventory accumulation had slowed. Book-value inventory-to-sales ratios in April were similar to their pre-recession norms, and survey data also suggested that inventory positions generally remained in a comfortable range. The available data on government spending indicated that real federal purchases increased in recent months, led by a rebound in outlays for defense in April and May from unusually low levels in the first quarter. In contrast, real expenditures by state and local governments appeared to have declined further, as outlays for construction projects fell in March and April, and state and local employment continued to contract in April and May. The U.S. international trade deficit widened slightly in March and then narrowed in April to a level below its average in the first quarter. Exports rose strongly in both months, with increases widespread across major categories in March, while the gains in April were concentrated in industrial supplies and capital goods. Imports grew robustly in March, but they fell slightly in April, as the drop in automotive imports from Japan together with the decline in imports of petroleum products more than offset increases in other imported products. Headline consumer price inflation, which had risen in the first quarter, edged down a bit in April and May, as the prices of consumer food and energy decelerated from the pace seen in previous months. More recently, survey data through the middle of June pointed to declines in retail gasoline prices, and prices of food commodities appeared to have decreased somewhat. Excluding food and energy, core consumer price inflation picked up in April and May, pushing the 12-month change in the core consumer price index through May above its level of a year earlier. Upward pressures on core consumer prices appeared to reflect the elevated prices of commodities and other imports, along with notable increases in motor vehicle prices likely arising from the effects of recent supply chain disruptions and the resulting extremely low level of automobile inventories. However, near-term inflation expectations from the Thomson Reuters/University of Michigan Surveys of Consumers moved down a little in May and early June from the high level seen in April, and longer-term inflation expectations remained within the range that has generally prevailed over the preceding few years. Available measures of labor compensation showed that labor cost pressures were still subdued, as wage increases continued to be restrained by the large amount of slack in the labor market. In the first quarter, unit labor costs only edged up, as the modest rise in hourly compensation in the nonfarm business sector was mostly offset by further gains in productivity. More recently, average hourly earnings for all employees rose in April and May, but the average rate of increase over the preceding 12 months remained quite low. Global economic activity appeared to have increased more slowly in the second quarter than in the first quarter. The rate of growth in the emerging market economies stepped down from its rapid pace in the first quarter, although it remained generally solid. The Japanese economy contracted sharply following the earthquake in March, and the associated supply chain disruptions weighed on the economies of many of Japan's trading partners. The pace of economic growth in the euro area remained uneven, with Germany and France posting moderate gains in economic activity, while the peripheral European economies continued to struggle. Recent declines in the prices of oil and other commodities contributed to some easing of inflationary pressures abroad. Staff Review of the Financial Situation Investors appeared to adopt a more cautious attitude toward risk, particularly later in the intermeeting period. The shift in investors' sentiment likely reflected the weak tone of incoming economic data in the United States along with concerns about the outlook for global economic growth and about potential spillovers from a possible further deterioration of the situation in peripheral Europe. The decisions by the FOMC at its April meeting to continue its asset purchase program and to maintain the 0 to 1/4 percent target range for the federal funds rate were generally in line with market expectations. The accompanying statement and subsequent press briefing by the Chairman prompted a modest decline in nominal yields, as market participants reportedly perceived a somewhat less optimistic tone in the Committee's economic outlook. Over the remainder of the intermeeting period, the expected path for the federal funds rate, along with yields on nominal Treasury securities, moved down appreciably further, as the bulk of the incoming economic data was more downbeat than market participants had apparently anticipated. Consistent with the weaker-than-expected economic data and the recent decline in the prices of oil and other commodities, measures of inflation compensation over the next 5 years and 5 to 10 years ahead based on nominal and inflation-protected Treasury securities decreased considerably over the intermeeting period. Market quotes did not suggest expectations of significant movements in nominal Treasury yields following the anticipated completion of the asset purchase program by the Federal Reserve at the end of June. Although discussions about the federal debt ceiling attracted attention in financial markets, judging from Treasury yields and other asset prices, investors seemed to anticipate that the debt ceiling would be increased in time to avoid any significant market disruptions. Yields on corporate bonds stepped down modestly, on net, over the intermeeting period, but by less than the decline in yields on comparable-maturity Treasury securities, leaving credit risk spreads a little wider. In the secondary market for syndicated loans, conditions were little changed, with average bid prices for leveraged loans holding steady. Broad U.S. stock price indexes declined, on net, over the intermeeting period, apparently in response to the downbeat economic data. Stock prices of financial firms underperformed the broader market, reflecting the weaker economic outlook, potential credit rating downgrades, and heightened concerns about the anticipated capital surcharge for systemically important financial institutions. Option-adjusted volatility on the S&P 500 index rose somewhat on net. In the June 2011 Senior Credit Officer Opinion Survey on Dealer Financing Terms, dealers pointed to a continued gradual easing over the previous three months in credit terms applicable to major classes of counterparties across all types of transactions covered in the survey. Dealers also reported that the demand for funding had increased over the same period for a broad range of securities, with the exception of equities. More recently, however, against a backdrop of disappointing economic data, heightened uncertainty about the situation in Europe, and, possibly, concerns about the U.S. federal debt ceiling, market participants reported a general pullback from risk-taking and a decline in liquidity in a range of financial markets. Net debt financing by nonfinancial corporations was strong in April and May. Gross issuance of both investment- and speculative-grade bonds by nonfinancial corporations hit a record high in May before slowing somewhat in June, and outstanding amounts of commercial and industrial (C&I) loans and nonfinancial commercial paper increased. Gross public equity issuance by nonfinancial firms maintained a solid pace over the intermeeting period, and most indicators of business credit quality improved further. Commercial mortgage markets continued to show tentative signs of stabilization. In recent months, delinquency rates for commercial real estate loans edged down from their previous peaks. However, commercial real estate markets remained weak. Property sales were tepid, and prices remained at depressed levels. Issuance of commercial mortgage-backed securities slowed somewhat in the second quarter. Conditions in residential mortgage markets were little changed overall but remained strained. Rates on conforming fixed-rate residential mortgages declined about in line with 10-year Treasury yields over the intermeeting period. Mortgage refinancing activity picked up, on net, over the intermeeting period but was still relatively subdued. Outstanding residential mortgage debt contracted further in the first quarter. Rates of serious delinquency for subprime and prime mortgages were little changed at elevated levels. The rate of new delinquencies on prime mortgages ticked up in April but remained well below the level of a few months ago. In March and April, delinquencies on mortgages backed by the Federal Housing Administration declined noticeably. The Federal Reserve continued its competitive sales of non-agency residential mortgage-backed securities held by Maiden Lane II LLC over the intermeeting period. Although the initial offerings of these securities were well received, investor demand at the most recent sales was not as strong, a development consistent with the declines in the prices of non-agency residential mortgage-backed securities over the intermeeting period. Conditions in consumer credit markets continued to improve. Growth in total consumer credit picked up in April, as the gain in nonrevolving credit more than offset a further contraction in revolving credit. Delinquency rates for consumer debt edged down further in recent months, with delinquency rates on some categories moving back to pre-crisis levels. Issuance of consumer asset-backed securities remained robust over the intermeeting period. Bank credit was flat, on balance, in April and May. Core loans--the sum of C&I, real estate, and consumer loans--continued to contract modestly, pulled down by the ongoing decline in commercial and residential real estate loans. In contrast, C&I loans increased at a brisk pace in April and May. The most recent Survey of Terms of Business Lending conducted in May indicated that banks had eased some lending terms on C&I loans. The survey responses also suggested that the average size of loan commitments and their average maturity had trended up in recent quarters M2 expanded at a robust pace in April and May. Liquid deposits, the largest component of M2, maintained a solid rate of expansion, likely reflecting the very low opportunity costs of holding such deposits. Currency continued to advance, supported by strong demand for U.S. bank notes from abroad. The broad nominal index of the U.S. dollar fluctuated over the intermeeting period in response to changes in investors' assessment of the outlook for the U.S. economy and the situation in the peripheral European economies. Since the April FOMC meeting, the dollar rose modestly, on net, after depreciating over the preceding several months. Headline equity indexes abroad and foreign benchmark sovereign yields declined over the intermeeting period in apparent response to signs of a slowdown in the pace of global economic activity and reduced demand for risky assets. Concerns about the possibility of a restructuring of Greek government debt drove spreads of yields on the sovereign debts of Greece, Ireland, and Portugal to record highs relative to yields on German bunds. In the advanced foreign economies, most central banks left their policy rates unchanged, and the anticipated pace of monetary policy tightening indicated by money market futures quotes was pared back. However, central banks in several emerging market economies continued to tighten policy, and the monetary authorities in China increased required reserve ratios further. Staff Economic Outlook With the recent data on spending, income, production, and labor market conditions mostly weaker than the staff had anticipated at the time of the April FOMC meeting, the near-term projection for the rate of increase in real gross domestic product (GDP) was revised down. The effects of the disaster in Japan and of higher commodity prices on the rate of increase in real consumer spending were expected to hold down U.S. real GDP growth in the near term, but those effects were anticipated to be transitory. However, the staff also read the incoming economic data as suggesting that the underlying pace of the recovery was softer than they had previously anticipated, and they marked down their outlook for economic growth over the medium term. Nevertheless, the staff still projected real GDP to increase at a moderate rate in the second half of 2011 and in 2012, with the ongoing recovery in activity receiving continued support from accommodative monetary policy, further increases in credit availability, and anticipated improvements in household and business confidence. The average pace of real GDP growth was expected to be sufficient to bring the unemployment rate down very slowly over the projection period, and the jobless rate was anticipated to remain elevated at the end of 2012. Although increases in consumer food and energy prices slowed a bit in recent months, the continued step-up in core consumer price inflation led the staff to raise slightly its projection for core inflation over the coming quarters. However, headline inflation was still expected to recede over the medium term, as increases in food and energy prices and in non-oil import prices were anticipated to ease further. As in previous forecasts, the staff continued to project that core consumer price inflation would remain relatively subdued over the projection period, reflecting both stable long-term inflation expectations and persistent slack in labor and product markets. Participants' Views on Current Conditions and the Economic Outlook In conjunction with this FOMC meeting, all meeting participants--the five members of the Board of Governors and the presidents of the 12 Federal Reserve Banks--provided projections of output growth, the unemployment rate, and inflation for each year from 2011 through 2013 and over the longer run. Longer-run projections represent each participant's assessment of the rate to which each variable would be expected to converge, over time, under appropriate monetary policy and in the absence of further shocks to the economy. Participants' forecasts are described in the Summary of Economic Projections, which is attached as an addendum to these minutes. In their discussion of the economic situation and outlook, meeting participants agreed that the economic information received during the intermeeting period indicated that the economic recovery was continuing at a moderate pace, though somewhat more slowly than they had anticipated at the time of the April meeting. Participants noted several transitory factors that were restraining growth, including the global supply chain disruptions in the wake of the Japanese earthquake, the unusually severe weather in some parts of the United States, a drop in defense spending, and the effects of increases in oil and other commodity prices this year on household purchasing power and spending. Participants expected that the expansion would gain strength as the influence of these temporary factors waned. Nonetheless, most participants judged that the pace of the economic recovery was likely to be somewhat slower over coming quarters than they had projected in April. This judgment reflected the persistent weakness in the housing market, the ongoing efforts by some households to reduce debt burdens, the recent sluggish growth of income and consumption, the fiscal contraction at all levels of government, and the effects of uncertainty regarding the economic outlook and future tax and regulatory policies on the willingness of firms to hire and invest. Moreover, the recovery remained subject to some downside risks, such as the possibility of a more extended period of weak activity and declining prices in the housing sector, the chance of a larger-than-expected near-term fiscal tightening, and potential financial and economic spillovers if the situation in peripheral Europe were to deteriorate further. Participants still projected that the unemployment rate would decline gradually toward levels they saw as consistent with the Committee's dual mandate, but at a more gradual pace than they had forecast in April. While higher prices for energy and other commodities had boosted inflation this year, with commodity prices expected to change little going forward and longer-term inflation expectations stable, most participants anticipated that inflation would subside to levels at or below those consistent with the Committee's dual mandate. Activity in the business sector appeared to have slowed somewhat over the intermeeting period. Although the effects of the Japanese disaster on U.S. motor vehicle production accounted for much of the deceleration in industrial production since March, the most recent readings from various regional manufacturing surveys suggested a slowing in the pace of manufacturing activity more broadly. However, business contacts in some sectors--most notably energy and high tech--reported that activity and business sentiment had strengthened further in recent months. Business investment in equipment and software generally remained robust, but growth in new orders for nondefense capital goods--though volatile from month to month--appeared to have slowed. While FOMC participants expected a rebound in investment in motor vehicles to boost capital outlays in coming months, some also noted that indicators of current and planned business investment in equipment and software had weakened somewhat, and surveys showed some deterioration in business sentiment. Business contacts in some regions reported that they were reducing capital budgets in response to the less certain economic outlook, but in other parts of the country, contacts noted that business sentiment remained on a firm footing, supported in part by strong export demand. Compared with the relatively robust outlook for the business sector, meeting participants noted that the housing sector, including residential construction and home sales, remained depressed. Despite efforts aimed at mitigation, foreclosures continued to add to the already very large inventory of vacant homes, putting downward pressure on home prices and housing construction. Meeting participants generally noted that the most recent data on employment had been disappointing, and new claims for unemployment insurance remained elevated. The recent deterioration in labor market conditions was a particular concern for FOMC participants because the prospects for job growth were seen as an important source of uncertainty in the economic outlook, particularly in the outlook for consumer spending. Several participants reported feedback from business contacts who were delaying hiring until the economic and regulatory outlook became more certain and who indicated that they expected to meet any near-term increase in the demand for their products without boosting employment; these participants noted the risk that such cautious attitudes toward hiring could slow the pace at which the unemployment rate normalized. Wage gains were generally reported to be subdued, although wages for a few skilled job categories in which workers were in short supply were said to be increasing relatively more rapidly. Changes in financial market conditions since the April meeting suggested that investors had become more concerned about risk. Equity markets had seen a broad selloff, and risk spreads for many corporate borrowers had widened noticeably. Large businesses that have access to capital markets continued to enjoy ready access to credit--including syndicated loans--on relatively attractive terms; however, credit conditions remained tight for smaller, bank-dependent firms. Bankers again reported gradual improvements in credit quality and generally weak loan demand. In identifying possible risks to financial stability, a few participants expressed concern that credit conditions in some sectors--most notably the agriculture sector--might have eased too much amid signs that investors in these markets were aggressively taking on more leverage and risk in order to obtain higher returns. Meeting participants also noted that an escalation of the fiscal difficulties in Greece and spreading concerns about other peripheral European countries could cause significant financial strains in the United States. It was pointed out that some U.S. money market mutual funds have significant exposures to financial institutions from core European countries, which, in turn, have substantial exposures to Greek sovereign debt. Participants were also concerned about the possible effect on financial markets of a failure to raise the statutory federal debt ceiling in a timely manner. While admitting that it was difficult to know what the precise effects of such a development would be, participants emphasized that even a short delay in the payment of principal or interest on the Treasury Department's debt obligations would likely cause severe market disruptions and could also have a lasting effect on U.S. borrowing costs. Participants noted several factors that had contributed to the increase in inflation this year. The run-up in energy prices, as well as an increase in prices of other commodities and imported goods, had boosted both headline and core inflation. At same time, extremely low motor vehicle inventories resulting from global supply disruptions in the wake of the Japanese earthquake--by contributing to higher motor vehicle prices--had significantly raised inflation, although participants anticipated that these temporary pressures would lessen as motor vehicle inventories were rebuilt. Participants also observed that crude oil prices fell over the intermeeting period and other commodity prices also moderated, developments that were likely to damp headline inflation at the consumer level going forward. However, a number of participants pointed out that the recent faster pace of price increases was widespread across many categories of spending and was evident in inflation measures such as trimmed means or medians, which exclude the most extreme price movements in each period. The discussion of core inflation and similar indicators reflected the view expressed by some participants that such measures are useful for forecasting the path of inflation over the medium run. In addition, reports from business contacts indicated that some already had passed on, or were intending to try to pass on, at least a portion of their higher costs to customers in order to maintain profit margins. Most participants expected that much of the rise in headline inflation this year would prove transitory and that inflation over the medium term would be subdued as long as commodity prices did not continue to rise rapidly and longer-term inflation expectations remained stable. Nevertheless, a number of participants judged the risks to the outlook for inflation as tilted to the upside. Moreover, a few participants saw a continuation of the current stance of monetary policy as posing some upside risk to inflation expectations and actual inflation over time. However, other participants observed that measures of longer-term inflation compensation derived from financial instruments had remained stable of late, and that survey-based measures of longer-term inflation expectations also had not changed appreciably, on net, in recent months. These participants noted that labor costs were rising only slowly, and that persistent slack in labor and product markets would likely limit upward pressures on prices in coming quarters. Participants agreed that it would be important to pay close attention to the evolution of both inflation and inflation expectations. A few participants noted that the adoption by the Committee of an explicit numerical inflation objective could help keep longer-term inflation expectations well anchored. Another participant, however, expressed concern that the adoption of such an objective could, in effect, alter the relative importance of the two components of the Committee's dual mandate. Participants also discussed the medium-term outlook for monetary policy. Some participants noted that if economic growth remained too slow to make satisfactory progress toward reducing the unemployment rate and if inflation returned to relatively low levels after the effects of recent transitory shocks dissipated, it would be appropriate to provide additional monetary policy accommodation. Others, however, saw the recent configuration of slower growth and higher inflation as suggesting that there might be less slack in labor and product markets than had been thought. Several participants observed that the necessity of reallocating labor across sectors as the recovery proceeds, as well as the loss of skills caused by high levels of long-term unemployment and permanent separations, may have temporarily reduced the economy's level of potential output. In that case, the withdrawal of monetary accommodation may need to begin sooner than currently anticipated in financial markets. A few participants expressed uncertainty about the efficacy of monetary policy in current circumstances but disagreed on the implications for future policy. Committee Policy Action  In the discussion of monetary policy for the period ahead, members agreed that the Committee should complete its $600 billion asset purchase program at the end of the month and that no changes to the target range for the federal funds rate were warranted at this meeting. The information received over the intermeeting period indicated that the economic recovery was continuing at a moderate pace, though somewhat more slowly than the Committee had expected, and that the labor market was weaker than anticipated. Inflation had increased in recent months as a result of higher prices for some commodities, as well as supply chain disruptions related to the tragic events in Japan. Nonetheless, members saw the pace of the economic expansion as picking up over the coming quarters and the unemployment rate resuming its gradual decline toward levels consistent with the Committee's dual mandate. Moreover, with longer-term inflation expectations stable, members expected that inflation would subside to levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate. However, many members saw the outlook for both employment and inflation as unusually uncertain. Against this backdrop, members agreed that it was appropriate to maintain the Committee's current policy stance and accumulate further information regarding the outlook for growth and inflation before deciding on the next policy step. On the one hand, a few members noted that, depending on how economic conditions evolve, the Committee might have to consider providing additional monetary policy stimulus, especially if economic growth remained too slow to meaningfully reduce the unemployment rate in the medium run. On the other hand, a few members viewed the increase in inflation risks as suggesting that economic conditions might well evolve in a way that would warrant the Committee taking steps to begin removing policy accommodation sooner than currently anticipated. In the statement to be released following the meeting, all members agreed that it was appropriate to acknowledge that the recovery had been slower than the Committee had expected at the time of the April meeting and to note the factors that were currently weighing on economic growth and boosting inflation. The Committee agreed that the statement should briefly describe its current projections for unemployment and inflation relative to the levels of those variables that members see as consistent with the Committee's dual mandate. In the discussion of inflation in the statement, members decided to reference inflation--meaning overall inflation--rather than underlying inflation or inflation trends, in order to be clear that the Committee's objective is the level of overall inflation in the medium term. The Committee also decided to reiterate that economic conditions were likely to warrant exceptionally low levels for the federal funds rate for an extended period; in addition, the Committee noted that it would review regularly the size and composition of its securities holdings, and that it is prepared to adjust those holdings as appropriate. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to complete purchases of $600 billion of longer-term Treasury securities by the end of this month. The Committee also directs the Desk to maintain its existing policy of reinvesting principal payments on all domestic securities in the System Open Market Account in Treasury securities in order to maintain the total face value of domestic securities at approximately $2.6 trillion. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability." The vote encompassed approval of the statement below to be released at 12:30 p.m.: "Information received since the Federal Open Market Committee met in April indicates that the economic recovery is continuing at a moderate pace, though somewhat more slowly than the Committee had expected. Also, recent labor market indicators have been weaker than anticipated. The slower pace of the recovery reflects in part factors that are likely to be temporary, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan. Household spending and business investment in equipment and software continue to expand. However, investment in nonresidential structures is still weak, and the housing sector continues to be depressed. Inflation has picked up in recent months, mainly reflecting higher prices for some commodities and imported goods, as well as the recent supply chain disruptions. However, longer-term inflation expectations have remained stable. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The unemployment rate remains elevated; however, the Committee expects the pace of recovery to pick up over coming quarters and the unemployment rate to resume its gradual decline toward levels that the Committee judges to be consistent with its dual mandate. Inflation has moved up recently, but the Committee anticipates that inflation will subside to levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations. To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent. The Committee continues to anticipate that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate for an extended period. The Committee will complete its purchases of $600 billion of longer-term Treasury securities by the end of this month and will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate. The Committee will monitor the economic outlook and financial developments and will act as needed to best foster maximum employment and price stability." Voting for this action: Ben Bernanke, William C. Dudley, Elizabeth Duke, Charles L. Evans, Richard W. Fisher, Narayana Kocherlakota, Charles I. Plosser, Sarah Bloom Raskin, Daniel K. Tarullo, and Janet L. Yellen. Voting against this action: None. External Communications In follow-up to discussions at the January meeting, the Committee turned to consideration of policies aimed at supporting effective communication with the public regarding the outlook for the economy and monetary policy. The subcommittee on communication, chaired by Governor Yellen and composed of Governor Duke and Presidents Fisher and Rosengren, proposed policies for Committee participants and for Federal Reserve System staff to follow in their communications with the public in order to reinforce the public's confidence in the transparency and integrity of the monetary policy process. By unanimous vote, the Committee approved the policies.2 Participants all supported the policies, but several of them emphasized that the policy for staff, in particular, should be applied with judgment and common sense so as to avoid interfering with legitimate research. It was agreed that the next meeting of the Committee would be held on Tuesday, August 9, 2011. The meeting adjourned at 12:10 p.m. on June 22, 2011. Notation Vote By notation vote completed on May 17, 2011, the Committee unanimously approved the minutes of the FOMC meeting held on April 26-27, 2011.   _____________________________ William B. English Secretary 1. Attended the portion of the meeting relating to dynamic stochastic general equilibrium models. Return to text 2. The policies are available at http://www.federalreserve.gov/monetarypolicy/files/FOMC_ExtCommunicationParticipants.pdf and http://www.federalreserve.gov/monetarypolicy/files/FOMC_ExtCommunicationStaff.pdf. Return to text Return to top

2011-06-22

Statement

Information received since the Federal Open Market Committee met in April indicates that the economic recovery is continuing at a moderate pace, though somewhat more slowly than the Committee had expected.  Also, recent labor market indicators have been weaker than anticipated.  The slower pace of the recovery reflects in part factors that are likely to be temporary, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan.  Household spending and business investment in equipment and software continue to expand.  However, investment in nonresidential structures is still weak, and the housing sector continues to be depressed.  Inflation has picked up in recent months, mainly reflecting higher prices for some commodities and imported goods, as well as the recent supply chain disruptions.  However, longer-term inflation expectations have remained stable. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.  The unemployment rate remains elevated; however, the Committee expects the pace of recovery to pick up over coming quarters and the unemployment rate to resume its gradual decline toward levels that the Committee judges to be consistent with its dual mandate.  Inflation has moved up recently, but the Committee anticipates that inflation will subside to levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate.  However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.  To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent.  The Committee continues to anticipate that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate for an extended period.  The Committee will complete its purchases of $600 billion of longer-term Treasury securities by the end of this month and will maintain its existing policy of reinvesting principal payments from its securities holdings.  The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.  The Committee will monitor the economic outlook and financial developments and will act as needed to best foster maximum employment and price stability. Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Richard W. Fisher; Narayana Kocherlakota; Charles I. Plosser; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen.

2011-05-18

Minute

A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held in the offices of the Board of Governors in Washington, D.C., on Tuesday, April 26, 2011, at 10:30 a.m. and continued on Wednesday, April 27, 2011, at 8:30 a.m. PRESENT: Ben Bernanke, Chairman William C. Dudley, Vice Chairman Elizabeth Duke Charles L. Evans Richard W. Fisher Narayana Kocherlakota Charles I. Plosser Sarah Bloom Raskin Daniel K. Tarullo Janet L. Yellen Christine Cumming, Jeffrey M. Lacker, Dennis P. Lockhart, Sandra Pianalto, and John C. Williams, Alternate Members of the Federal Open Market Committee James Bullard, Thomas M. Hoenig, and Eric Rosengren, Presidents of the Federal Reserve Banks of St. Louis, Kansas City, and Boston, respectively William B. English, Secretary and Economist Deborah J. Danker, Deputy Secretary Matthew M. Luecke, Assistant Secretary David W. Skidmore, Assistant Secretary Michelle A. Smith, Assistant Secretary Scott G. Alvarez, General Counsel Thomas C. Baxter, Deputy General Counsel Nathan Sheets, Economist David J. Stockton, Economist James A. Clouse, Thomas A. Connors, Steven B. Kamin, Loretta J. Mester, David Reifschneider, Harvey Rosenblum, David W. Wilcox, and Kei-Mu Yi, Associate Economists Brian Sack, Manager, System Open Market Account Jennifer J. Johnson, Secretary of the Board, Office of the Secretary, Board of Governors Patrick M. Parkinson, Director, Division of Banking Supervision and Regulation, Board of Governors Nellie Liang, Director, Office of Financial Stability Policy and Research, Board of Governors Robert deV. Frierson, Deputy Secretary, Office of the Secretary, Board of Governors William Nelson, Deputy Director, Division of Monetary Affairs, Board of Governors Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors Charles S. Struckmeyer, Deputy Staff Director, Office of the Staff Director, Board of Governors Lawrence Slifman and William Wascher, Senior Associate Directors, Division of Research and Statistics, Board of Governors Andrew T. Levin, Senior Adviser, Office of Board Members, Board of Governors Joyce K. Zickler, Visiting Senior Adviser, Division of Monetary Affairs, Board of Governors Michael G. Palumbo, Associate Director, Division of Research and Statistics, Board of Governors; Trevor A. Reeve,¹ Associate Director, Division of International Finance, Board of Governors Fabio M. Natalucci, Assistant Director, Division of Monetary Affairs, Board of Governors David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors Jeremy B. Rudd, Senior Economist, Division of Research and Statistics, Board of Governors James M. Lyon, First Vice President, Federal Reserve Bank of Minneapolis Jamie J. McAndrews and Mark S. Sniderman, Executive Vice Presidents, Federal Reserve Banks of New York and Cleveland, respectively David Altig, Alan D. Barkema, Richard P. Dzina, David Marshall, Christopher J. Waller, and John A. Weinberg, Senior Vice Presidents, Federal Reserve Banks of Atlanta, Kansas City, New York, Chicago, St. Louis, and Richmond, respectively John Fernald and Giovanni Olivei, Vice Presidents, Federal Reserve Banks of San Francisco and Boston, respectively Developments in Financial Markets and the Federal Reserve's Balance Sheet The Manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets during the period since the Federal Open Market Committee (FOMC) met on March 15, 2011. He also reported on System open market operations, including the continuing reinvestment into longer-term Treasury securities of principal payments received on the SOMA's holdings of agency debt and agency-guaranteed mortgage-backed securities (MBS) as well as the ongoing purchases of additional Treasury securities first authorized in November 2010. Since November, purchases by the Open Market Desk of the Federal Reserve Bank of New York had increased the SOMA's holdings by $422 billion. The Manager reported on the U.S. authorities' participation in the coordinated foreign exchange intervention announced by the Group of Seven (G-7) finance ministers and central bank governors on March 17, 2011. By unanimous votes, the Committee ratified the Desk's domestic and foreign exchange market transactions over the intermeeting period. By unanimous vote, the Committee agreed to extend the reciprocal currency (swap) arrangements with the Bank of Canada and the Banco de México for an additional year beginning in mid-December 2011; these arrangements are associated with the Federal Reserve's participation in the North American Framework Agreement of 1994. The arrangement with the Bank of Canada is in the amount of $2 billion equivalent, and the arrangement with the Banco de México is in the amount of $3 billion equivalent. The vote to renew the System's participation in these swap arrangements was taken at this meeting because of a provision in the arrangements that requires each party to provide six months' prior notice of an intention to terminate its participation. The staff next gave a presentation on strategies for normalizing the stance and conduct of monetary policy over time as the economy strengthens. Normalizing the stance of policy would entail the withdrawal of the current extraordinary degree of accommodation at the appropriate time, while normalizing the conduct of policy would involve draining the large volume of reserve balances in the banking system and shrinking the overall size of the balance sheet, as well as returning the SOMA to its historical composition of essentially only Treasury securities. The presentation noted a few key issues that the Committee would need to address in deciding on its approach to normalization. The first key issue was the extent to which the Committee would want to tighten policy, at the appropriate time, by increasing short-term interest rates, by decreasing its holdings of longer-term securities, or both. Because the two policies would restrain economic activity by tightening financial conditions, they could be combined in various ways to achieve similar outcomes. For example, in principle, the Committee could accomplish essentially the same degree of monetary tightening by selling assets sooner and faster but raising the target for the federal funds rate later and more slowly, or by selling assets later and more slowly but increasing the federal funds rate target sooner and faster. The SOMA portfolio could be reduced by selling securities outright, by ceasing the reinvestment of principal payments on its securities holdings, or both. A second key issue was the extent to which the Committee might choose to vary the pace of any asset sales it undertakes in response to economic and financial conditions. If it chose to make the pace of sales quite responsive to conditions, the FOMC would be able to actively use two policy instruments--asset sales and the federal funds rate target--to pursue its economic objectives, which could increase the scope and flexibility for adjusting financial conditions. In contrast, sales at a pace that varied less with changes in economic and financial conditions and was preannounced and largely predetermined would leave the federal funds rate target as the Committee's primary active policy instrument, which could result in policy that is more straightforward for the Committee to calibrate and to communicate. Finally, the staff presentation noted that the Committee would need to decide if and when to use the tools that it has developed to temporarily reduce reserve balances--reverse repurchase agreements and term deposits--in order to tighten the correspondence between any changes in the interest rate the Federal Reserve pays on excess reserves and the changes in the federal funds rate. Meeting participants agreed on several principles that would guide the Committee's strategy for normalizing monetary policy. First, with regard to the normalization of the stance of monetary policy, the pace and sequencing of the policy steps would be driven by the Committee's monetary policy objectives for maximum employment and price stability. Participants noted that the Committee's decision to discuss the appropriate strategy for normalizing the stance of policy at the current meeting did not mean that the move toward such normalization would necessarily begin soon. Second, to normalize the conduct of monetary policy, it was agreed that the size of the SOMA's securities portfolio would be reduced over the intermediate term to a level consistent with the implementation of monetary policy through the management of the federal funds rate rather than through variation in the size or composition of the Federal Reserve's balance sheet. Third, over the intermediate term, the exit strategy would involve returning the SOMA to holding essentially only Treasury securities in order to minimize the extent to which the Federal Reserve portfolio might affect the allocation of credit across sectors of the economy. Such a shift was seen as requiring sales of agency securities at some point. And fourth, asset sales would be implemented within a framework that had been communicated to the public in advance, and at a pace that potentially could be adjusted in response to changes in economic or financial conditions. In addition, nearly all participants indicated that the first step toward normalization should be ceasing to reinvest payments of principal on agency securities and, simultaneously or soon after, ceasing to reinvest principal payments on Treasury securities. Most participants viewed halting reinvestments as a way to begin to gradually reduce the size of the balance sheet. It was noted, however, that ending reinvestments would constitute a modest step toward policy tightening, implying that that decision should be made in the context of the economic outlook and the Committee's policy objectives. In addition, changes in the statement language regarding forward policy guidance would need to accompany the normalization process. Participants expressed a range of views on some aspects of a normalization strategy. Most participants indicated that once asset sales became appropriate, such sales should be put on a largely predetermined and preannounced path; however, many of those participants noted that the pace of sales could nonetheless be adjusted in response to material changes in the economic outlook. Several other participants preferred instead that the pace of sales be a key policy tool and be varied actively in response to changes in the outlook. A majority of participants preferred that sales of agency securities come after the first increase in the FOMC's target for short-term interest rates, and many of those participants also expressed a preference that the sales proceed relatively gradually, returning the SOMA's composition to all Treasury securities over perhaps five years. Participants noted that, for any given degree of policy tightening, more-gradual sales that commenced later in the normalization process would allow for an earlier increase of the federal funds rate target from its effective lower bound than would be the case if asset sales commenced earlier and at a more rapid pace. As a result, the Committee would later have the option of easing policy with an interest rate cut if economic conditions then warranted. An earlier increase in the federal funds rate was also mentioned as helpful to limit the potential for the very low level of that rate to encourage financial imbalances. A few participants expressed a preference that sales begin before any increase in the federal funds rate target, and a few other participants indicated that sales and increases in the federal funds rate target should commence at the same time. The participants who favored earlier sales also generally indicated a preference for relatively rapid sales, with some suggesting that agency securities in the SOMA be reduced to zero over as little as one or two years. Such an approach was viewed as allowing for a faster return to a normal policy environment, potentially reducing any upside risks to inflation stemming from outsized reserve balances, and more quickly eliminating any effects of SOMA holdings of agency securities on the allocation of credit.   Most participants saw changes in the target for the federal funds rate as the preferred active tool for tightening monetary policy when appropriate. A number of participants noted that it would be advisable to begin using the temporary reserves-draining tools in advance of an increase in the Committee's federal funds rate target, in part because doing so would put the Federal Reserve in a better position to assess the effectiveness of the draining tools and judge the size of draining operations that might be required to support changes in the interest on excess reserves (IOER) rate in implementing a desired increase in short-term rates. A number of participants also noted that they would be prepared to sell securities sooner if the temporary reserves-draining operations and the end of the reinvestment of principal payments were not sufficient to support a fairly tight link between increases in the IOER rate and increases in short-term market interest rates. In the discussion of normalization, some participants also noted their preferences about the longer-run framework for monetary policy implementation. Most of these participants indicated that they preferred that monetary policy eventually operate through a corridor-type system in which the federal funds rate trades in the middle of a range, with the IOER rate as the floor and the discount rate as the ceiling of the range, as opposed to a floor-type system in which a relatively high level of reserve balances keeps the federal funds rate near the IOER rate. A couple of participants noted that any normalization strategy would likely involve an elevated balance sheet with the federal funds rate target near the IOER rate--as in floor-type systems--for some time, and therefore the Committee would accumulate experience during the process of normalizing policy that would allow it to make a more informed choice regarding the longer-term framework at a later date. The Committee agreed that more discussion of these issues was needed, and no decisions regarding the Committee's strategy for normalizing policy were made at this meeting. Staff Review of the Economic Situation The information reviewed at the April 26–27 meeting indicated, on balance, that economic activity expanded at a moderate pace in recent months, and labor market conditions continued to improve gradually. Headline consumer price inflation was boosted by large increases in food and energy prices, but measures of underlying inflation were still subdued and longer-run inflation expectations remained stable. Private nonfarm payroll employment increased again in March, and the gains in hiring for the first quarter as a whole were somewhat above the pace seen in the fourth quarter. A number of indicators of job openings and hiring plans improved in February and March. Although initial claims for unemployment insurance were flat, on net, from early March through the middle of April, they remained lower than earlier in the year. The unemployment rate edged down further to 8.8 percent in March, while the labor force participation rate was unchanged. However, both long-duration unemployment and the share of workers employed part time for economic reasons were still very high. Industrial production in the manufacturing sector expanded at a robust pace in February and March. The manufacturing capacity utilization rate moved up further, though it continued to be a good bit lower than its longer-run average. Most forward-looking indicators of industrial activity, such as the new orders indexes in the national and regional manufacturing surveys, remained at levels consistent with solid gains in production in the near term. However, motor vehicle assemblies were expected to step down in the second quarter from their level in March, reflecting emerging shortages of specialized components imported from Japan. The rise in consumer spending appeared to have slowed to a moderate rate in the first quarter from the stronger pace posted in the fourth quarter of last year. Total real personal consumption expenditures picked up in February after being about unchanged in January. Nominal retail sales, excluding purchases at motor vehicles and parts outlets, posted a sizable gain in March, but sales of new light motor vehicles declined somewhat. Real disposable income edged down in February following an increase in January that reflected the temporary reduction in payroll taxes. In addition, consumer sentiment declined noticeably in March and remained relatively downbeat in early April. Activity in the housing market remained very weak, as the large overhang of foreclosed and distressed properties continued to restrain new construction. Starts and permits of new single-family homes inched down, on net, in February and March, and they have been essentially flat since around the middle of last year. Demand for housing also continued to be depressed. Sales of new and existing homes moved lower, on net, in February and March, while measures of home prices slid further in February. Real business investment in equipment and software (E&S) appeared to have increased more robustly in the first quarter than in the fourth quarter of last year. Nominal shipments of nondefense capital goods rose in February and March, and businesses' purchases of new vehicles trended higher. New orders of nondefense capital goods continued to run ahead of shipments in February and March, and this expanding backlog of unfilled orders pointed to further increases in shipments in subsequent months. In addition, survey measures of business conditions and sentiment in recent months were consistent with continued robust gains in E&S spending. In contrast, business outlays for nonresidential construction remained extremely weak in February, restrained by high vacancy rates, low prices for office and commercial properties, and tight credit conditions for commercial real estate lending. Real nonfarm inventory investment appeared to have moved up to a moderate pace in the first quarter after slowing sharply in the preceding quarter. Motor vehicle inventories were drawn down more slowly in the first quarter than in the fourth quarter, while data through February suggested that the pace of stockbuilding outside of motor vehicles had picked up a bit. Book-value inventory-to-sales ratios in February were in line with their pre-recession norms, and survey data in March provided little evidence that businesses perceived that their inventories were too high. The available data on government spending indicated that real federal purchases fell in the first quarter, led by a reduction in defense outlays. Real expenditures by state and local governments also appeared to have declined, as outlays for construction projects decreased further in February to a level well below that in the fourth quarter, and state and local employment continued to contract in March. The U.S. international trade deficit narrowed slightly in February after widening sharply in January. Following a solid increase in January, exports fell back some in February, with declines widespread across categories. Imports also declined in February after posting large gains in January. On average, the trade deficit in January and February was wider than in the fourth quarter. Overall U.S. consumer price inflation moved up further in February and March, as increases in the prices of energy and food commodities continued to be passed through to the retail level. More recently, survey data through the middle of April pointed to additional increases in retail gasoline prices, while increases in the prices of food commodities appeared to have moderated somewhat. Excluding food and energy, core consumer price inflation remained relatively subdued. Although core consumer price inflation over the first three months of the year stepped up somewhat, the 12-month change in the core consumer price index through March was essentially the same as it was a year earlier. Near-term inflation expectations from the Thomson Reuters/University of Michigan Surveys of Consumers remained elevated in early April. But longer-term inflation expectations moved down in early April--reversing their uptick in March--and stayed within the range that has prevailed over the past several years. Available measures of labor compensation suggested that wage increases continued to be restrained by the presence of a large margin of slack in the labor market. Average hourly earnings for all employees were flat in March, and their average rate of increase over the preceding 12 months remained low. The pace of recovery abroad appeared to have strengthened earlier this year, but the disaster in Japan raised uncertainties about foreign activity in the near term. In the euro area, production expanded at a solid pace, though indicators of consumer spending weakened. While measures of economic activity in Germany posted strong gains, economic conditions in Greece and Portugal deteriorated further. The damage caused by the earthquake and tsunami in Japan appeared to be sharply curtailing Japanese economic activity and posed concerns about disruptions to supply chains and production in other economies. Emerging market economies (EMEs) continued to expand rapidly. Rising prices of oil and other commodities boosted inflation in foreign economies. However, core inflation remained subdued in most of the advanced foreign economies, and inflation in the EMEs seemed to have declined as food price inflation slowed. Staff Review of the Financial Situation The decisions by the FOMC at its March meeting to continue its asset purchase program and to maintain the 0 to 1/4 percent target range for the federal funds rate were in line with market expectations; nonetheless, the accompanying statement prompted a modest rise in nominal yields, as market participants reportedly perceived a somewhat more optimistic tone in the Committee's economic outlook, as well as heightened concern about inflation risks. Over the intermeeting period, yields on nominal Treasury securities changed little, on net, amid swings in investors' assessments of global risks. Short-term funding rates, including the effective federal funds rate, shifted down several basis points in early April following a change in the Federal Deposit Insurance Corporation's deposit insurance assessment system. On net, the expected path of the federal funds rate over the next two years was little changed over the intermeeting period. Measures of inflation compensation over the next 5 years based on nominal and inflation-protected Treasury securities increased slightly, on net, over the intermeeting period, partly reflecting the ongoing rise in commodity prices. Staff models suggested that the modest increase in inflation compensation 5 to 10 years ahead was mostly attributable to increases in liquidity and inflation-risk premiums rather than higher expected inflation. Over the intermeeting period, yields on corporate bonds were generally little changed, on net, and spreads of investment- and speculative-grade corporate bonds relative to comparable-maturity Treasury securities narrowed slightly. Average secondary-market prices for syndicated leveraged loans moved up further. However, conditions in the municipal bond market remained somewhat strained. Broad U.S. stock price indexes rose, on net, over the intermeeting period, as initial reports of better-than-expected first-quarter earnings lifted stock prices in late April. Option-implied volatility on the S&P 500 index was moderately lower, on net, ending the intermeeting period at the low end of its recent range. Net debt financing by nonfinancial corporations remained robust in March. Net issuance of investment- and speculative-grade bonds by nonfinancial corporations continued to be strong, and outstanding amounts of commercial and industrial (C&I) loans and nonfinancial commercial paper increased noticeably. Gross public equity issuance by nonfinancial firms was robust in March, and indicators of the credit quality of nonfinancial firms improved further. Commercial mortgage markets showed some signs of stabilization. Delinquency rates for commercial real estate loans appeared to have leveled off in recent months. Issuance of commercial mortgage-backed securities picked up in the first quarter, although commercial real estate loans at banks continued to run off. In commercial real estate markets, property sales remained tepid, and prices stayed at depressed levels. Rates on conforming fixed-rate residential mortgages rose modestly during the intermeeting period, and their spreads relative to 10-year Treasury yields narrowed slightly. Mortgage refinancing activity remained near its lowest level in more than two years. The Treasury Department's announcement in late March that it would begin selling its holdings of agency MBS at a gradual pace had little lasting effect on MBS spreads. The Federal Reserve began competitive sales of the non-agency residential MBS held by Maiden Lane II LLC; initial sales met with strong demand, but market prices of non-agency residential MBS were reportedly little changed overall. The rates of serious delinquencies for subprime and prime mortgages were nearly unchanged but remained at elevated levels. However, the rate of new delinquencies on prime mortgages declined further. Conditions in consumer credit markets continued to improve gradually. Total consumer credit growth picked up in February, as a gain in nonrevolving credit more than offset a further contraction in revolving credit. Delinquency and charge-off rates for credit card debt moved down in recent months and approached pre-crisis levels. Issuance of consumer asset-backed securities remained steady in the first quarter of the year. Bank credit was about unchanged in March after declining, on average, in January and February. Core loans--the sum of C&I, real estate, and consumer loans--continued to contract, while holdings of securities increased moderately. The Senior Loan Officer Opinion Survey on Bank Lending Practices conducted in April indicated that, on net, bank lending standards and terms had eased somewhat further during the first quarter of the year and demand for C&I loans, commercial mortgages, and auto loans had increased, while demand for residential mortgages continued to decline. M2 expanded at a moderate pace in March. Liquid deposits, the largest component of M2, advanced at a solid pace likely reflecting very low opportunity costs of holding such deposits. Currency advanced significantly, supported by robust foreign demand for U.S. bank notes. Foreign sovereign bond yields generally were little changed and equity prices rose, on net, over the intermeeting period, although equity prices in Japan remained below their pre-earthquake levels despite the record amounts of liquidity injected by the Bank of Japan and the expansion of its asset purchase program. The European Central Bank raised its main policy rate 25 basis points to 1-1/4 percent during the intermeeting period, and markets appeared to have priced in additional rate increases over the rest of the year. The Bank of England and the Bank of Canada left their policy rates unchanged, but quotes from futures markets continued to suggest that both central banks would raise rates later this year. China's monetary authority further increased banks' lending rates and deposit rates and continued to tighten reserve requirements; monetary policy in a number of other EMEs was also tightened over the intermeeting period. The broad nominal index of the U.S. dollar declined more than 2 percent over the intermeeting period, though the dollar appreciated, on net, against the Japanese yen. The yen strengthened to an all-time high against the dollar after the earthquake in Japan, but this move was more than reversed when the G-7 countries intervened to sell yen. In early April, the Portuguese government requested financial support from the European Union and the International Monetary Fund, but market participants reportedly remained concerned about whether the Portuguese government would reach agreement on an associated fiscal consolidation plan. Later in the intermeeting period, yields on Greece's and other peripheral European countries' sovereign debt jumped, reflecting heightened market focus on a possible restructuring of Greek sovereign debt. Staff Economic Outlook With the recent data on spending somewhat weaker, on balance, than the staff had expected at the time of the March FOMC meeting, the staff revised down its projection for the rate of increase in real gross domestic product (GDP) over the first half of 2011. The effects from the disaster in Japan were also anticipated to temporarily hold down real GDP growth in the near term. Over the medium term, the staff's outlook for the pace of economic growth was broadly similar to its previous forecast: As in the March projection, the staff expected real GDP to increase at a moderate rate through 2012, with the ongoing recovery in activity receiving continued support from accommodative monetary policy, increasing credit availability, and further improvements in household and business confidence. The average pace of GDP growth was expected to be sufficient to gradually reduce the unemployment rate over the projection period, though the jobless rate was anticipated to remain elevated at the end of 2012. Recent increases in consumer food and energy prices, together with the small uptick in core consumer price inflation, led the staff to raise its near-term projection for consumer price inflation. However, inflation was expected to recede over the medium term, as food and energy prices were anticipated to decelerate. As in previous forecasts, the staff expected core consumer price inflation to remain subdued over the projection period, reflecting stable longer-term inflation expectations and persistent slack in labor and product markets. Participants' Views on Current Conditions and the Economic Outlook In conjunction with this FOMC meeting, all meeting participants--the five members of the Board of Governors and the presidents of the 12 Federal Reserve Banks--provided projections of output growth, the unemployment rate, and inflation for each year from 2011 through 2013 and over the longer run. Longer-run projections represent each participant's assessment of the rate to which each variable would be expected to converge, over time, under appropriate monetary policy and in the absence of further shocks. Participants' forecasts are described in the Summary of Economic Projections, which is attached as an addendum to these minutes. In discussing intermeeting developments and their implications for the economic outlook, participants agreed that the information received since their previous meeting was broadly consistent with continuation of a moderate economic recovery, despite an unexpected slowing in the pace of economic growth in the first quarter. While construction activity remained anemic, measures of consumer spending and business investment continued to expand and labor market conditions continued to improve gradually. Participants viewed the weakness in first-quarter economic growth as likely to be largely transitory, influenced by unusually severe weather, increases in energy and other commodity prices, and lower-than-expected defense spending. As a result, they saw economic growth picking up later this year. Participants' forecasts for economic growth for 2012 and 2013 were largely unchanged from their January projections and continued to indicate expectations that the recovery will strengthen somewhat over time. Nonetheless, the pickup in the pace of the economic expansion was expected to be limited, reflecting the effects of high energy prices, modest changes in housing wealth, subdued real income gains, and fiscal contraction at the federal, state, and local levels. Participants continued to project the unemployment rate to decline gradually over the forecast period but to remain elevated compared with their assessments of its longer-run level. Participants revised up their projections for total inflation in 2011, reflecting recent increases in energy and other commodity prices, but they generally anticipated that the recent increase in inflation would be transitory as commodity prices stabilize and inflation expectations remain anchored. However, they all agreed on the importance of closely monitoring developments regarding inflation and inflation expectations. Participants' judgment that the recovery was continuing at a moderate pace reflected both the incoming economic indicators and information received from business contacts. Growth in consumer spending remained moderate despite the effects of higher gasoline and food prices, which appeared to have largely offset the increase in disposable income from the payroll tax cut. Participants noted that these higher prices had weighed on consumer sentiment about near-term economic conditions but that underlying fundamentals for continued moderate growth in spending remained in place. These underlying factors included continued improvement in household balance sheets, easing credit conditions, and strengthening labor markets. Activity in the industrial sector also expanded further. Industrial production posted solid gains, and, while the most recent readings from some of the regional manufacturing surveys showed small declines, in some cases these were from near-record highs. Manufacturers remained upbeat, although automakers were reporting some difficulties in obtaining parts normally produced in Japan, which might weigh on motor vehicle production in the current quarter. Investment in equipment and software was fairly robust. In contrast, the housing sector remained distressed, with house prices flat to down and a large overhang of vacant properties restraining new construction, although reports indicated that sales volumes and traffic were higher in a few areas. Activity in the commercial real estate sector continued to be weak. Several participants indicated that, in contrast to the somewhat weaker recent economic data, their business contacts were more positive about the economy's prospects, which supported the participants' view that the recent weakness was likely to prove temporary. They acknowledged, however, that sentiment can change quickly; indeed, one participant noted that his contacts had recently turned more pessimistic, and several participants indicated that their business contacts expressed concern about the effects of higher commodity prices on their own costs and on the purchasing power of households. Participants judged that overall conditions in labor markets had continued to improve, albeit gradually. The unemployment rate had decreased further and payroll employment had risen again in March. Some participants reported that more of their business contacts have plans to increase their payrolls later this year. A few participants noted that firms may be poised to accelerate their pace of hiring because they have exhausted potential productivity gains, but others indicated that some firms may be putting hiring plans on hold until they are more certain of the future trend in materials and other input costs. Signs of rising wage pressures were reportedly limited to a few skilled job categories for which workers are in short supply, while, in general, increases in wages have been subdued. Participants discussed whether the significant drop in the unemployment rate might be overstating the degree of improvement in labor markets because many of the unemployed have dropped out of the labor force or have accepted jobs that are less desirable than their former jobs. Financial market conditions continued to improve over the intermeeting period. Equity prices had risen, on balance, since the previous meeting, reflecting an improved outlook for earnings, and were up more substantially since the start of the year. Bankers again reported improvements in credit quality, with the volume of nonperforming assets declining at larger banks and leveling off at smaller banks. In general, loan demand remained weak. However, bank lending to medium-sized and larger companies increased, and lending to small businesses picked up slightly. Banks reported an easing of lending terms on C&I loans, usually prompted by increased competition in the face of still-weak loan demand. Consumer credit conditions also eased somewhat from the tight conditions seen during the recession. However, demand for consumer credit other than auto loans reportedly changed little. A few participants expressed concern that the easing of credit conditions was creating incentives for increased leverage and risk-taking in some areas, such as leveraged syndicated loans and loans to finance land acquisition, and that this trend, if it became widespread and excessive, could pose a risk to financial stability. Participants discussed the recent rise in inflation, which had been driven largely by significant increases in energy and, to a somewhat lesser extent, other commodity prices. These commodity price increases, in turn, reflected robust global demand and geopolitical developments that had reduced supply. One participant suggested that excess liquidity might be leading to speculation in commodity markets, possibly putting upward pressure on prices. Many participants reported that an increasing number of business contacts expressed concerns about rising cost pressures and were intending, or already attempting, to pass on at least a portion of these higher costs to their customers in order to protect profit margins. This development was also reflected in the rising indexes of prices paid and received in several regional manufacturing surveys. Some participants noted that higher commodity prices were negatively affecting both business and consumer sentiment. Core inflation and other indicators of underlying inflation over the medium term had increased modestly in recent months, but their levels remained subdued. Participants generally anticipated that the higher level of overall inflation would be transitory. This outlook was based partly on a projected leveling-off of commodity prices and the belief that longer-run inflation expectations would remain stable. Some participants noted that pressures on labor costs continued to be muted; if such circumstances continued, a large, persistent rise in inflation would be unusual. Measures of near-term inflation expectations had risen along with the recent rise in overall inflation. While some indicators of longer-term expectations had increased, others were little changed or down, on net, since March. Many participants had become more concerned about the upside risks to the inflation outlook, including the possibilities that oil prices might continue to rise, that there might be greater pass-through of higher commodity costs into broader price measures, and that elevated overall inflation caused by higher energy and other commodity prices could lead to a rise in longer-term inflation expectations. Participants agreed that monitoring inflation trends and inflation expectations closely was important in determining whether action would be needed to prevent a more lasting pickup in the rate of general price inflation, which would be costly to reverse. Maintaining well-anchored inflation expectations would depend on the credibility of the Committee's commitment to deliver on the price stability part of its mandate. A few participants suggested that clearer communication about the Committee's inflation outlook, such as explaining the measures it uses to gauge medium-term trends in general price inflation and announcing an explicit numerical inflation objective, would be helpful in this regard. While rising energy prices posed an upside risk to the inflation forecast, they also posed a downside risk to economic growth. Although most participants continued to see the risks to their outlooks for economic growth as being broadly balanced, a number now judged those risks to be tilted to the downside. These downside risks included a larger-than-expected drag on household and business spending from higher energy prices, continued fiscal strains in Europe, larger-than-anticipated effects from supply disruptions in the aftermath of the disaster in Japan, continuing fiscal adjustments at all levels of government in the United States, financial disruptions that would be associated with a failure to increase the federal debt limit, and the possibility that the economic weakness in the first quarter was signaling less underlying momentum going forward. However, participants also noted that the rapid decline in the unemployment rate over the past several months suggested the possibility of stronger-than-anticipated economic growth over coming quarters. In their discussion of monetary policy, some participants expressed the view that in the context of increased inflation risks and roughly balanced risks to economic growth, the Committee would need to be prepared to begin taking steps toward less-accommodative policy. A few of these participants thought that economic conditions might warrant action to raise the federal funds rate target or to sell assets in the SOMA portfolio later this year, but noted that even with such steps, monetary policy would remain accommodative for some time to come. However, some participants indicated that underlying inflation remained subdued; that longer-term inflation expectations were likely to remain anchored, partly because modest changes in labor costs would constrain inflation trends; and that given the downside risks to economic growth, an early exit could unnecessarily damp the ongoing economic recovery. Committee Policy Action Committee members agreed that no changes to the Committee's asset purchase program or to its target range for the federal funds rate were warranted at this meeting. The information received over the intermeeting period indicated that the economic recovery was proceeding at a moderate pace, albeit somewhat slower than had been anticipated earlier in the year. Overall conditions in the labor market were gradually improving, and the unemployment rate continued to decline, although it remained elevated relative to levels that the Committee judged to be consistent, over the longer run, with its statutory mandate of maximum employment and price stability. Significant increases in energy and other commodity prices had boosted overall inflation, but members expected this increase to be transitory and to unwind when commodity price increases abated. Notwithstanding recent modest increases, indicators of medium-term inflation remained subdued and somewhat below the levels seen as consistent with the dual mandate as indicated by the Committee's longer-run inflation projections. Near-term inflation expectations had increased with energy prices and overall inflation. Recent movements in measures of longer-term inflation expectations were discussed. While some measures of longer-term inflation expectations had risen, others were little changed or down, on net, since March, and members agreed that longer-term inflation expectations had remained stable. Given this economic outlook, the Committee agreed to continue to expand its holdings of longer-term Treasury securities as announced in November in order to promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with the Committee's mandate. Specifically, the Committee maintained its existing policy of reinvesting principal payments from its securities holdings and affirmed that it will complete purchases of $600 billion of longer-term Treasury securities by the end of the current quarter. A few members remained uncertain about the benefits of the asset purchase program but, with the program nearly completed, judged that making changes to the program at this time was not appropriate. The Committee continued to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, were likely to warrant exceptionally low levels for the federal funds rate for an extended period. That said, a few members viewed the increase in inflation risks as suggesting that economic conditions might well evolve in a way that would warrant the Committee taking steps toward less-accommodative policy sooner than currently anticipated. Members agreed that the Committee will regularly review the size and composition of its securities holdings in light of incoming information and that they are prepared to adjust those holdings as needed to best foster maximum employment and price stability. Some members pointed out that there would need to be a significant change in the economic outlook, or the risks to that outlook, before another program of asset purchases would be warranted; in their view, absent such changes, the benefits of additional purchases would be unlikely to outweigh the costs. In the statement to be released following the meeting, members decided to indicate that the economic recovery was proceeding at a moderate pace and that overall conditions in the labor market were gradually improving. The Committee also decided to summarize its current thinking about inflation pressures and to emphasize that it will closely monitor the evolution of inflation and inflation expectations. Members anticipated that the Chairman, who would deliver his first postmeeting press briefing later that afternoon, would provide additional context for the Committee's policy decisions. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to execute purchases of longer-term Treasury securities in order to increase the total face value of domestic securities held in the System Open Market Account to approximately $2.6 trillion by the end of June 2011. The Committee also directs the Desk to reinvest principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability." The vote encompassed approval of the statement below to be released at 12:30 p.m.:  "Information received since the Federal Open Market Committee met in March indicates that the economic recovery is proceeding at a moderate pace and overall conditions in the labor market are improving gradually. Household spending and business investment in equipment and software continue to expand. However, investment in nonresidential structures is still weak, and the housing sector continues to be depressed. Commodity prices have risen significantly since last summer, and concerns about global supplies of crude oil have contributed to a further increase in oil prices since the Committee met in March. Inflation has picked up in recent months, but longer-term inflation expectations have remained stable and measures of underlying inflation are still subdued. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The unemployment rate remains elevated, and measures of underlying inflation continue to be somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Increases in the prices of energy and other commodities have pushed up inflation in recent months. The Committee expects these effects to be transitory, but it will pay close attention to the evolution of inflation and inflation expectations. The Committee continues to anticipate a gradual return to higher levels of resource utilization in a context of price stability. To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to continue expanding its holdings of securities as announced in November. In particular, the Committee is maintaining its existing policy of reinvesting principal payments from its securities holdings and will complete purchases of $600 billion of longer-term Treasury securities by the end of the current quarter. The Committee will regularly review the size and composition of its securities holdings in light of incoming information and is prepared to adjust those holdings as needed to best foster maximum employment and price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate." Voting for this action: Ben Bernanke, William C. Dudley, Elizabeth Duke, Charles L. Evans, Richard W. Fisher, Narayana Kocherlakota, Charles I. Plosser, Sarah Bloom Raskin, Daniel K. Tarullo, and Janet L. Yellen. Voting against this action: None. It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, June 21-22, 2011. The meeting adjourned at 10:15 a.m. on April 27, 2011. Notation Vote By notation vote completed on April 4, 2011, the Committee unanimously approved the minutes of the FOMC meeting held on March 15, 2011.   _____________________________ William B. English Secretary 1. Attended Tuesday's session only. Return to text Return to top

2011-04-27

Statement

Information received since the Federal Open Market Committee met in March indicates that the economic recovery is proceeding at a moderate pace and overall conditions in the labor market are improving gradually.  Household spending and business investment in equipment and software continue to expand.  However, investment in nonresidential structures is still weak, and the housing sector continues to be depressed.  Commodity prices have risen significantly since last summer, and concerns about global supplies of crude oil have contributed to a further increase in oil prices since the Committee met in March.  Inflation has picked up in recent months, but longer-term inflation expectations have remained stable and measures of underlying inflation are still subdued. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.  The unemployment rate remains elevated, and measures of underlying inflation continue to be somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate.  Increases in the prices of energy and other commodities have pushed up inflation in recent months.  The Committee expects these effects to be transitory, but it will pay close attention to the evolution of inflation and inflation expectations.  The Committee continues to anticipate a gradual return to higher levels of resource utilization in a context of price stability. To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to continue expanding its holdings of securities as announced in November.  In particular, the Committee is maintaining its existing policy of reinvesting principal payments from its securities holdings and will complete purchases of $600 billion of longer-term Treasury securities by the end of the current quarter.  The Committee will regularly review the size and composition of its securities holdings in light of incoming information and is prepared to adjust those holdings as needed to best foster maximum employment and price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.  The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate. Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Richard W. Fisher; Narayana Kocherlakota; Charles I. Plosser; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen.

2011-03-15

Statement

Information received since the Federal Open Market Committee met in January suggests that the economic recovery is on a firmer footing, and overall conditions in the labor market appear to be improving gradually. Household spending and business investment in equipment and software continue to expand. However, investment in nonresidential structures is still weak, and the housing sector continues to be depressed. Commodity prices have risen significantly since the summer, and concerns about global supplies of crude oil have contributed to a sharp run-up in oil prices in recent weeks. Nonetheless, longer-term inflation expectations have remained stable, and measures of underlying inflation have been subdued. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, the unemployment rate remains elevated, and measures of underlying inflation continue to be somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. The recent increases in the prices of energy and other commodities are currently putting upward pressure on inflation. The Committee expects these effects to be transitory, but it will pay close attention to the evolution of inflation and inflation expectations. The Committee continues to anticipate a gradual return to higher levels of resource utilization in a context of price stability. To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to continue expanding its holdings of securities as announced in November. In particular, the Committee is maintaining its existing policy of reinvesting principal payments from its securities holdings and intends to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate. Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Richard W. Fisher; Narayana Kocherlakota; Charles I. Plosser; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen.

2011-04-05

Minute

A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors in Washington, D.C., on Tuesday, March 15, 2011, at 8:30 a.m. PRESENT: Ben Bernanke, Chairman William C. Dudley, Vice Chairman Elizabeth Duke Charles L. Evans Richard W. Fisher Narayana Kocherlakota Charles I. Plosser Sarah Bloom Raskin Daniel K. Tarullo Janet L. Yellen Jeffrey M. Lacker, Dennis P. Lockhart, Sandra Pianalto, and John C. Williams, Alternate Members of the Federal Open Market Committee James Bullard, Thomas M. Hoenig, and Eric Rosengren, Presidents of the Federal Reserve Banks of St. Louis, Kansas City, and Boston, respectively William B. English, Secretary and Economist Matthew M. Luecke, Assistant Secretary David W. Skidmore, Assistant Secretary Michelle A. Smith, Assistant Secretary Scott G. Alvarez, General Counsel Nathan Sheets, Economist David J. Stockton, Economist James A. Clouse, Thomas A. Connors, Steven B. Kamin, Loretta J. Mester, David Reifschneider, Harvey Rosenblum, Daniel G. Sullivan, and David W. Wilcox, Associate Economists Brian Sack, Manager, System Open Market Account Nellie Liang, Director, Office of Financial Stability Policy and Research, Board of Governors Maryann F. Hunter, Deputy Director, Division of Banking Supervision and Regulation, Board of Governors; William Nelson, Deputy Director, Division of Monetary Affairs, Board of Governors Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors Charles S. Struckmeyer, Deputy Staff Director, Office of the Staff Director, Board of Governors Lawrence Slifman and William Wascher, Senior Associate Directors, Division of Research and Statistics, Board of Governors Andrew T. Levin, Senior Adviser, Office of Board Members, Board of Governors; Stephen A. Meyer, Senior Adviser, Division of Monetary Affairs, Board of Governors Joyce K. Zickler, Visiting Senior Adviser, Division of Monetary Affairs, Board of Governors Michael G. Palumbo, Associate Director, Division of Research and Statistics, Board of Governors David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors Andrea L. Kusko, Senior Economist, Division of Research and Statistics, Board of Governors Randall A. Williams, Records Management Analyst, Division of Monetary Affairs, Board of Governors Blake Prichard, First Vice President, Federal Reserve Bank of Philadelphia Jeff Fuhrer and Robert H. Rasche, Executive Vice Presidents, Federal Reserve Banks of Boston and St. Louis, respectively David Altig, Richard P. Dzina, Ron Feldman, Craig S. Hakkio, Richard Peach, Glenn D. Rudebusch, Mark E. Schweitzer, and John A. Weinberg, Senior Vice Presidents, Federal Reserve Banks of Atlanta, New York, Minneapolis, Kansas City, New York, San Francisco, Cleveland, and Richmond, respectively In the agenda for this meeting, it was reported that advices of the election of John C. Williams as an alternate member of the Federal Open Market Committee had been received by the Secretariat, and that he had executed his oath of office. Developments in Financial Markets and the Federal Reserve's Balance Sheet The Manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets during the period since the Federal Open Market Committee (FOMC) met on January 25-26, 2011. He also reported on System open market operations, including the ongoing reinvestment into longer-term Treasury securities of principal payments received on the SOMA's holdings of agency debt and agency-guaranteed mortgage-backed securities (MBS) that the Committee authorized in August 2010, as well as the purchase of additional longer-term Treasury securities to increase the face value of such securities held in the SOMA that the FOMC first authorized in November 2010. Since November, purchases by the Open Market Desk of the Federal Reserve Bank of New York had increased the SOMA's holdings by $310 billion. The Manager reported that achieving an increase of $600 billion in SOMA holdings by the end of June 2011 would require continuing to purchase additional securities at an unchanged pace of about $80 billion per month. There were no open market operations in foreign currencies for the System's account over the intermeeting period. By unanimous vote, the Committee ratified the Desk's transactions over the intermeeting period. The Manager also discussed the possible benefits of gradually reducing the pace of the Federal Reserve's purchases of Treasury securities when the current asset purchase program nears completion. As its earlier program of agency MBS purchases drew to a close, the Federal Reserve tapered its purchases during the first quarter of 2010 in order to avoid disruptions in the market for those securities. However, the Manager indicated that the greater depth and liquidity of the Treasury securities market suggested that it would not be necessary to taper purchases in this market. The Manager noted that market participants appeared to have reached the same conclusion, as they generally did not seem to expect the Federal Reserve to taper its purchases of Treasury securities. In light of the Manager's report, almost all meeting participants indicated that they saw no need to taper the pace of the Committee's purchases of Treasury securities when its current program of asset purchases approaches its end. Staff Review of the Economic Situation The information reviewed at the March 15 meeting indicated that the economic recovery continued to proceed at a moderate pace, with a further gradual improvement in labor market conditions. Sizable increases in prices of crude oil and other commodities pushed up headline inflation, but measures of underlying inflation were subdued and longer-run inflation expectations remained stable. The labor market continued to show signs of firming. Private nonfarm payroll employment rose noticeably in February after a small increase in January, with the swing in hiring likely magnified by widespread snow-storms, which may have held down the employment figure for January. Initial claims for unemployment insurance trended lower through early March, and surveys of hiring plans had improved this year. The unemployment rate dropped markedly in January after a similar decrease in the preceding month, then ticked down to 8.9 percent in February; the labor force participation rate was roughly flat in January and February. The share of workers employed part time for economic reasons declined further over the past two months, but long-duration unemployment was still elevated. Total industrial production was little changed in January after a strong rise in December. Manufacturing output posted a relatively subdued gain in January, likely held down somewhat by the extensive snowfalls during that month; in addition, a scheduled step-up in assemblies of motor vehicles reportedly was restrained in part by some temporary bottlenecks in the supply chain. As a result, the rate of capacity utilization in manufacturing was essentially unchanged in January, and it remained well below its 1972-2010 average. In February, indicators of near-term industrial production, such as the new orders diffusion indexes in the national and regional manufacturing surveys, were at levels consistent with solid increases in factory output in the coming months. Moreover, motor vehicle assemblies picked up in February and were scheduled to rise further through the second quarter of this year. Consumer spending appeared to have increased at a modest pace in early 2011 after rising briskly in the fourth quarter of 2010. In January, total real personal consumption expenditures (real PCE) were essentially flat. In February, nominal retail sales, excluding purchases of motor vehicles and parts, rose moderately; sales of light motor vehicles posted a robust gain. Consumer spending was supported by a solid increase in real disposable income in January, reflecting in part the temporary cut in payroll taxes. Household net worth rose in the fourth quarter, as the increase in equity values during that period more than offset the further fall in house prices. However, consumer sentiment dropped back in early March, retracing its increase over the preceding four months. Activity in the housing market continued to be depressed, held down by the large inventory of foreclosed or distressed properties on the market and by weak demand. In January, starts and permits for new single-family homes remained near the low levels that had prevailed since the middle of 2010. New home sales moved down in January; existing home sales stepped up somewhat but still were quite low by historical standards. Measures of house prices softened again in December and January. Real business investment in equipment and software (E&S) appeared to rise further in recent months. Nominal shipments of nondefense capital goods excluding aircraft increased, on net, in December and January, and the expanding backlog of unfilled orders pointed to further gains in shipments in subsequent months. In addition, readings on business conditions and sentiment remained consistent with solid near-term advances in outlays for E&S. Credit conditions continued to improve for many firms, though they reportedly were still tight for small businesses. In contrast to the apparent increase in E&S outlays, nonresidential construction expenditures dropped further in December and January, constrained by high vacancy rates, low prices for commercial real estate, and persistently tight borrowing conditions for construction loans for commercial properties. Real nonfarm inventory investment appeared to have picked up in early 2011 after slowing markedly in the fourth quarter. In the motor vehicles sector, inventories rose slightly, on net, in January and February after having been drawn down in the fourth quarter. Outside of motor vehicles, the rise in the book value of business inventories was somewhat larger in January than the average monthly increase in the fourth quarter, while inventory-to-sales ratios for most industries covered by these data were similar to their pre-recession norms. Survey data also suggested that inventory positions were generally in a comfortable range. In the government sector, the available information suggested that real defense spending in January and February was below its average level in the fourth quarter. At the state and local level, ongoing fiscal pressures were reflected in further job cuts in January and February. Construction outlays by these governments fell again in January. The U.S. international trade deficit widened in December and again in January, with rapid gains in both exports and imports. The largest increases in exports were in capital goods, industrial supplies, and automotive products. Nominal imports of petroleum products rose sharply, reflecting both higher prices and greater volumes; imports in other major categories rose solidly on net. Overall consumer prices in the United States rose somewhat faster in December and January than in earlier months, as consumer energy prices posted further sizable increases and consumer food prices responded to the recent upturn in farm commodity prices. The price index for PCE excluding food and energy (the core PCE price index) rose slightly in January, boosted by an uptick in prices of core goods after four months of declines; the 12-month change in this core price index stayed near the very low levels seen in late 2010. Recent surveys showed further hefty increases in retail gasoline prices in February and early March, and prices of nonfuel industrial commodities also rose sharply on net. According to the Thomson Reuters/University of Michigan Surveys of Consumers, households' near-term inflation expectations increased substantially in early March, likely because of the run-up in gasoline prices; longer-term inflation expectations moved up somewhat in the early March survey but were still within the range that prevailed over the preceding few years. Labor cost pressures remained muted in the fourth quarter, as hourly compensation continued to be restrained by the wide margin of slack in the labor market and as productivity rose further. Average hourly earnings posted a modest increase, on net, in January and February. Growth in real activity in the advanced foreign economies appeared to pick up after a lackluster performance in the fourth quarter. In the euro area, monthly indicators of activity, such as retail sales and purchasing managers indexes, were generally positive in January and February. But the divergence in economic performance across euro-area countries remained large, as economic activity appeared to have expanded strongly in Germany but to have contracted in Greece and Portugal. Prior to the earthquake and tsunami in mid-March, economic activity in Japan had shown signs of firming. The upbeat tenor of the incoming data for the emerging market economies suggested that the economic expansion in these countries continued to outpace that in the advanced economies. Foreign consumer price inflation, which stepped up noticeably in the fourth quarter, remained elevated in early 2011, largely because of higher food and energy prices. Staff Review of the Financial Situation The decisions by the FOMC at its January meeting to continue its asset purchase program and to maintain the 0 to 1/4 percent target range for the federal funds rate were largely in line with market expectations, as was the accompanying statement; they elicited only a modest market reaction. Over the weeks following the FOMC meeting, nominal Treasury yields and the expected path of the federal funds rate in coming quarters moved higher, as market participants apparently read the incoming economic data as, on balance, somewhat better than expected. After mid-February, however, Treasury yields and policy expectations retraced their earlier rise amid concerns about the possible economic fallout from events in the Middle East and North Africa (MENA) region. In the days leading up to the March FOMC meeting, the tragic developments in Japan spurred a further decline in Treasury yields. On net, expectations for the federal funds rate, along with yields on nominal Treasury securities, were little changed over the intermeeting period. Measures of inflation compensation over the next 5 years rose, on net, over the intermeeting period, with most of the increase concentrated at the front end of the curve, likely reflecting the jump in oil prices. In contrast, measures of forward inflation compensation 5 to 10 years ahead were little changed, suggesting that longer-term inflation expectations remained stable. Over the intermeeting period, yields on investment- and speculative-grade corporate bonds edged down relative to those on comparable-maturity Treasury securities. The secondary-market prices of syndicated loans continued to move up. Strains in the municipal bond market eased as concerns about the budgetary problems of state and local governments seemed to diminish somewhat. Conditions in short-term funding markets were little changed. Broad U.S. stock price indexes were about unchanged, on net, over the intermeeting period. Option-implied volatility on the S&P 500 index rose sharply in mid-February in response to events in the MENA region and remained somewhat elevated thereafter. The staff's estimate of the spread between the expected real equity return for S&P 500 firms and the real 10-year Treasury yield--a measure of the equity risk premium--narrowed a bit more over the intermeeting period but continued to be quite elevated relative to longer-term norms. In the March 2011 Senior Credit Officer Opinion Survey on Dealer Financing Terms, dealers reported a further easing, over the previous three months, in the price and nonprice terms they offered to different types of counterparties for all of the categories of transactions covered in the survey. Dealers noted that the demand for funding had increased for a broad range of securities over the same period. In response to special questions, dealers reported some increase in the use of leverage over the prior six months by traditionally unlevered investors--in particular, asset managers, insurance companies, and pension funds. In addition, dealers reported an increase in leverage over the past six months by hedge funds that pursue a variety of investment strategies. More broadly, while the availability and use of dealer-intermediated leverage had increased since its post-crisis nadir in mid-2009, a review of information from a variety of sources suggested that lev-erage generally remained well below the levels reached prior to the recent financial crisis. Net debt financing by nonfinancial corporations was solid in January and February, although it did not match the sizable amount seen in the fourth quarter. Net issuance of investment- and speculative-grade bonds was robust in the first two months of this year. Commercial and industrial (C&I) loans outstanding also increased, on balance, while the amount of nonfinancial commercial paper outstanding was little changed. Gross public equity issuance by nonfinancial firms was relatively subdued in January and February. Measures of the credit quality of nonfinancial firms continued to improve. Financing conditions for commercial real estate generally remained tight. So far this year, issuance of commercial mortgage-backed securities (CMBS) appeared to have maintained its modest fourth-quarter pace. Data on delinquency rates for commercial real estate loans were mixed. Rates on conforming fixed-rate residential mortgages, and their spreads relative to the 10-year Treasury yield, were about unchanged over the intermeeting period. With mortgage rates remaining above the low levels seen last fall, refinancing activity was tepid. Outstanding residential mortgage debt was estimated to have contracted again in the fourth quarter. Rates of serious delinquency for subprime and prime mortgages were little changed in December and January. Consumer credit markets showed further signs of improvement. Total consumer credit expanded moderately in January. As was the case in the fourth quarter, nonrevolving credit expanded while revolving credit ran off. Delinquency rates on credit card loans in securitized pools and on auto loans at finance companies continued to decline through January, nearly returning to their longer-run averages. The issuance of consumer asset-backed securities, which had weakened around the turn of the year, posted a moderate gain in February. Bank credit declined, on average, in January and February as a result of a contraction in core loans--the sum of C&I, real estate, and consumer loans; holdings of securities were about flat on net. The Survey of Terms of Business Lending conducted in the first week of February showed that spreads of interest rates on C&I loans over comparable-maturity Eurodollar and swap rates decreased somewhat but remained elevated. M2 increased at a moderate rate, on average, over January and February. Liquid deposits, the largest component of M2, expanded somewhat less rapidly than in the fourth quarter of 2010. Nonetheless, as has been the case for some time, the composition of M2 shifted toward liquid deposits, likely reflecting their higher yields relative to other M2 components. Currency continued to advance at a relatively fast rate in January and February, likely boosted by a strong expansion in foreign holdings of U.S. bank notes. In financial markets abroad, equity prices in the advanced economies rose early in the intermeeting period, but they turned down in mid-February as oil prices increased and then fell sharply in mid-March in the aftermath of the earthquake and tsunami in Japan. On net over the intermeeting period, stock prices were down in most of the advanced economies, with Japan's index having fallen most significantly. Emerging market equity price indexes, which had been underperforming in previous months, generally ended the period lower as well, and emerging market equity funds experienced outflows. Movements in 10-year sovereign bond yields in Europe and Canada mirrored those in equity prices, climbing early in the intermeeting period but falling later. In part because of downgrades by credit rating agencies, yields on the 10-year sovereign bonds of Greece, Ireland, and Portugal rose sharply, relative to those on German bonds, through early March. These spreads subsequently declined somewhat in response to a general agreement among euro-area leaders to expand the capacity of the area's backstop funding facility, to extend the maturity of the facility's loans to Greece, and to lower the interest rates on those loans. The European Central Bank (ECB) left its benchmark policy rate unchanged at its March meeting, but the emphasis on upside risks to inflation at the postmeeting press conference led market participants to infer that the ECB might well tighten policy at its meeting in April. In the United Kingdom, market-based readings on expected policy rates indicated that investors anticipated some tightening of policy before the end of this year. In addition, authorities in several emerging market economies took steps to tighten policy. The broad nominal index of the U.S. dollar declined about 1 percent, on balance, over the intermeeting period. Staff Economic Outlook The pace of economic activity appeared to have been a little slower around the turn of the year than the staff had anticipated at the time of the January FOMC meeting, and the near-term forecast for growth of real gross domestic product (GDP) was revised down modestly. However, the outlook for economic activity over the medium term was broadly similar to the projection prepared for the January FOMC meeting. Changes to the conditioning assumptions underlying the staff projection were mostly small and offsetting: Crude oil prices had risen sharply and federal fiscal policy seemed likely to be marginally more restrictive than the staff had judged in January, but these negative factors were counterbalanced by higher household net worth and a slightly lower foreign exchange value of the dollar. As a result, as in the January forecast, real GDP was expected to rise at a moderate pace over 2011 and 2012, supported by accommodative monetary policy, increasing credit availability, and greater household and business confidence. Reflecting the recent labor market data, the projection for the unemployment rate was lower throughout the forecast period than in the staff's January forecast, but the jobless rate was still expected to decline slowly and to remain elevated at the end of 2012. The staff revised up its projection for consumer price inflation in the near term, largely because of the recent increases in the prices of energy and food. However, in light of the projected persistence of slack in labor and product markets and the anticipated stability in long-term inflation expectations, the increase in inflation was expected to be mostly transitory if oil and other commodity prices did not rise significantly further. As a result, the forecast for consumer price inflation over the medium run was little changed relative to that prepared for the January meeting. Participants' Views on Current Conditions and the Economic Outlook In discussing intermeeting developments and their implications for the economic outlook, participants agreed that the information received since their previous meeting was broadly consistent with their expectations and suggested that the economic recovery was on a firmer footing. Looking through weather-related distortions in various indicators, measures of consumer spending, business investment, and employment showed continued expansion. Housing, however, remained depressed. Meeting participants took note of the significant decline in the unemployment rate over the past few months but observed that other indicators pointed to a more gradual improvement in overall labor market conditions. They continued to expect that economic growth would strengthen over coming quarters while remaining moderate. Participants noted that recent increases in the prices of oil and other commodities were putting upward pressure on headline inflation, but that measures of underlying inflation remained subdued. They anticipated that the effects on inflation of the recent run-up in commodity prices would prove transitory, in part because they saw longer-term inflation expectations remaining stable. Moreover, a number of participants expected that slack in resource utilization would continue to restrain increases in labor costs and prices. Nonetheless, participants observed that rapidly rising commodity prices posed upside risks to the stability of longer-term inflation expectations, and thus to the outlook for inflation, even as they posed downside risks to the outlook for growth in consumer spending and business investment. In addition, participants noted that unfolding events in the Middle East and North Africa, along with the recent earthquake, tsunami, and subsequent developments in Japan, had further increased uncertainty about the economic outlook. Participants' judgment that the recovery was gaining traction reflected both the incoming economic indicators and information received from business contacts. Spending by households, which had picked up noticeably in the fourth quarter, rose further during the early part of 2011, with auto sales showing particular strength. Although some participants noted that growth in consumer spending so far this year had not been as vigorous as they had anticipated, they attributed the shortfall in part to unusually bad weather. While participants expected that household spending would continue to expand, the pace of expansion was uncertain. On the one hand, labor market conditions were improving, though gradually, and the temporary cut in payroll taxes was contributing to rising after-tax incomes. Some easing of credit conditions for households, particularly for auto loans, also appeared to be supporting growth in consumer spending. On the other hand, declining house prices remained a drag on household wealth and thus on consumer spending. In addition, sizable recent increases in oil and gasoline prices had reduced real incomes and weighed on consumer confidence. Business contacts in a variety of industries had expressed concern that consumers might pull back if gasoline prices rose significantly further and persisted at those elevated levels. A further increase in business activity also indicated that the economic recovery remained on track. Industrial production posted solid gains, supported in part by continuing growth in U.S. exports. Business contacts in a number of regions reported they were more confident about the recovery; a growing number of contacts indicated they were planning for an expansion in hiring and production to meet an anticipated rise in sales. Manufacturing firms were particularly upbeat. Some contacts reported they were increasing capital budgets to undertake investment that had been postponed during the recession and early stages of the recovery; in some cases, firms were planning to expand capacity. Consistent with the anecdotal evidence, indicators of current and planned business investment in equipment and software continued to rise and surveys showed a further improvement in business sentiment. In addition, although residential construction remained weak, investment in energy extraction was growing and spending on commercial construction projects appeared to be bottoming out. Meeting participants judged that overall conditions in labor markets had continued to improve gradually. The unemployment rate had decreased significantly in recent months; other labor market indicators, including measures of job growth and hours worked, showed more-modest improvements. Several participants noted that the drop in unemployment was attributable more to people withdrawing from the labor force and to fewer layoffs than to increased hiring. Even so, participants agreed that gains in employment seemed to be on a gradually rising trajectory, although the recent data had been somewhat erratic and distorted by worse-than-usual weather in many parts of the country. In addition, surveys of employers showed that an increasing number of firms were planning to hire. Participants noted regional differences in the speed of improvement in labor markets; scattered reports indicated that firms in some regions were having difficulty hiring some types of highly skilled workers. Participants generally judged that there was still substantial slack in the labor market, though estimates of the degree of slack were admittedly imprecise and depended in part on judgments about a number of factors, including the extent to which labor force participation would increase as the recovery progresses and employment expands. Credit conditions remained uneven. Bankers again reported improving credit quality and generally weak loan demand. Large firms that have access to financial markets continued to find credit, including bank loans, available on relatively attractive terms; however, credit conditions reportedly remained tight for smaller, bank-dependent firms. Participants noted evidence that the availability of student loans and of consumer loans--particularly auto loans--was increasing. Indeed, bank and nonbank lenders reported that terms and conditions for auto loans had returned to historical norms. In contrast, terms for commercial and residential real estate loans remained tight and the volume of outstanding loans continued to decline, though there was some issuance of CMBS backed by loans on high-quality properties in selected large metropolitan areas. A few participants expressed concern that the easing of credit conditions in some sectors was becoming or might become excessive as investors took on more risk in order to obtain higher yields. Participants observed that headline inflation was being boosted by higher prices for energy and other commodities, and that prices of other imported goods also had risen by a substantial, though smaller, amount. A number of business contacts indicated that they were passing on at least a portion of these higher costs to their customers or that they planned to try to do so later this year; however, contacts were uncertain about the extent to which they could raise prices, given current market conditions and the cautious attitudes toward spending still held by households and businesses. Other participants noted that commodity and energy costs accounted for a relatively small share of production costs for most firms and that labor costs accounted for the bulk of such costs; moreover, they observed that unit labor costs generally had declined in recent years as productivity growth outpaced wage gains. Several participants noted that even large commodity price increases have had only limited effects on underlying inflation in recent decades. In contrast to headline inflation, core inflation and other measures of underlying inflation remained subdued, though they appeared to have bottomed out. A number of participants noted that, with significant slack in resource utilization and with longer-term inflation expectations stable, underlying inflation likely would remain subdued for some time. However, the importance of resource slack as a factor influencing inflation was debated. Some participants pointed to research indicating that measures of slack were useful in predicting inflation. Others argued that, historically, such measures were only modestly helpful in explaining large movements in inflation; one noted the 2003-04 episode in which core inflation rose rapidly over a few quarters even though there appeared to be substantial resource slack. Participants expected that the boost to headline inflation from recent increases in energy and other commodity prices would be transitory and that underlying inflation trends would be little affected as long as commodity prices did not continue to rise rapidly and longer-term inflation expectations remained stable. However, a significant increase in longer-term inflation expectations could contribute to excessive wage and price inflation, which would be costly to eradicate. Accordingly, participants considered it important to pay close attention to the evolution not only of headline and core inflation but also of inflation expectations. In this regard, participants observed that measures of longer-term inflation compensation derived from financial instruments had remained stable of late, suggesting that longer-term inflation expectations had not changed appreciably, although measures of one-year inflation compensation had risen notably. Survey-based measures of inflation expectations also indicated that longer-term expected inflation had risen much less than near-term inflation expectations. A few participants noted that the adoption by the Committee of an explicit numerical inflation objective could help keep longer-term inflation expectations well anchored. Participants generally judged the risks to their forecasts of growth in economic activity to be roughly balanced. They continued to see some downside risks from the banking and fiscal strains in the European periphery, the continuing fiscal adjustments by U.S. state and local governments, and the ongoing weakness in the housing market. Several also noted the possibility of larger-than-anticipated near-term cuts in federal government spending. Moreover, the economic implications of the tragedy in Japan--for example, with respect to global supply chains--were not yet clear. On the upside, the improvement in labor market conditions in recent months raised the possibility that household spending--and subsequently business investment--might expand more rapidly than anticipated; if so, the recovery could be stronger than currently projected. Participants judged that the potential for more-widespread disruptions in oil production, and thus for a larger jump in energy prices, posed both downside risks to growth and upside risks to inflation. Several of them indicated, in light of recent developments, that the risks to their forecasts of inflation had shifted somewhat to the upside. Finally, a few participants noted that if the large size of the Federal Reserve's balance sheet were to lead the public to doubt the Committee's ability to withdraw monetary accommodation when appropriate, the result could be upward pressure on inflation expectations and so on actual inflation. To mitigate such risks, participants agreed that the Committee would continue its planning for the eventual exit from the current, exceptionally accommodative stance of monetary policy. In light of uncertainty about the economic outlook, it was seen as prudent to consider possible exit strategies for a range of potential economic outcomes. A few participants indicated that economic conditions might warrant a move toward less-accommodative monetary policy this year; a few others noted that exceptional policy accommodation could be appropriate beyond 2011. Committee Policy Action In their discussion of monetary policy for the period ahead, Committee members agreed that no changes to the Committee's asset purchase program or to its target range for the federal funds rate were warranted at this meeting. The information received over the intermeeting period indicated that the economic recovery was on a firmer footing and that overall conditions in the labor market were gradually improving. Although the unemployment rate had declined in recent months, it remained elevated relative to levels that the Committee judged to be consistent, over the longer run, with its statutory mandate to foster maximum employment and price stability. Similarly, measures of underlying inflation continued to be somewhat low relative to levels seen as consistent with the dual mandate over the longer run. With longer-term inflation expectations remaining stable and measures of underlying inflation subdued, members anticipated that recent increases in the prices of energy and other commodities would result in only a transitory increase in headline inflation. Given this economic outlook, the Committee agreed to continue to expand its holdings of longer-term Treasury securities as announced in November in order to promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with the Committee's mandate. Specifically, the Committee maintained its existing policy of reinvesting principal payments from its securities holdings and reaffirmed its intention to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011. A few members remained uncertain about the benefits of the asset purchase program but judged that making changes to the program at this time was not appropriate. The Committee continued to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, were likely to warrant exceptionally low levels for the federal funds rate for an extended period. Members emphasized that the Committee would continue to regularly review the pace of its securities purchases and the overall size of the asset purchase program in light of incoming information--including information on the outlook for economic activity, developments in financial markets, and the efficacy of the purchase program and any unintended consequences that might arise--and would adjust the program as needed to best foster maximum employment and price stability. A few members noted that evidence of a stronger recovery, or of higher inflation or rising inflation expectations, could make it appropriate to reduce the pace or overall size of the purchase program. Several others indicated that they did not anticipate making adjustments to the program before its intended completion. With respect to the statement to be released following the meeting, members decided to note the further improvement in economic activity and in labor markets. The Committee also decided to summarize its current thinking about inflation pressures and to emphasize that it will closely monitor the evolution of overall inflation and inflation expectations. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Open Market Account in accordance with the following domestic policy directive: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to execute purchases of longer-term Treasury securities in order to increase the total face value of domestic securities held in the System Open Market Account to approximately $2.6 trillion by the end of June 2011. The Committee also directs the Desk to reinvest principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability." The vote encompassed approval of the statement below to be released at 2:15 p.m.: "Information received since the Federal Open Market Committee met in January suggests that the economic recovery is on a firmer footing, and overall conditions in the labor market appear to be improving gradually. Household spending and business investment in equipment and software continue to expand. However, investment in nonresidential structures is still weak, and the housing sector continues to be depressed. Commodity prices have risen significantly since the summer, and concerns about global supplies of crude oil have contributed to a sharp run-up in oil prices in recent weeks. Nonetheless, longer-term inflation expectations have remained stable, and measures of underlying inflation have been subdued. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, the unemployment rate remains elevated, and measures of underlying inflation continue to be somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. The recent increases in the prices of energy and other commodities are currently putting upward pressure on inflation. The Committee expects these effects to be transitory, but it will pay close attention to the evolution of inflation and inflation expectations. The Committee continues to anticipate a gradual return to higher levels of resource utilization in a context of price stability. To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to continue expanding its holdings of securities as announced in November. In particular, the Committee is maintaining its existing policy of reinvesting principal payments from its securities holdings and intends to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate." Voting for this action: Ben Bernanke, William C. Dudley, Elizabeth Duke, Charles L. Evans, Richard W. Fisher, Narayana Kocherlakota, Charles I. Plosser, Sarah Bloom Raskin, Daniel K. Tarullo, and Janet L. Yellen. Voting against this action: None. The Committee then discussed a recommendation, from its subcommittee on communications, that the Chairman conduct regular press conferences. Participants generally saw such press conferences as a potentially useful way to enhance transparency and strength-en the Committee's policy communications. They discussed various implications of, and alternative arrangements for, such press conferences. They generally endorsed holding press conferences after the four FOMC meetings each year for which participants provide numerical projections of several key economic variables, conditional on appropriate monetary policy. While those projections already are made public in the minutes of the relevant FOMC meetings, press conferences could be helpful in explaining how the Committee's monetary policy strategy is informed by participants' projections of the rates of output growth, unemployment, and inflation likely to prevail during each of the next few years, and by their assessments of the values of those variables that will prove most consistent, over the longer run, with the Committee's mandate to promote both maximum employment and stable prices. The outcome of the discussion was a decision that the Chairman would begin holding press conferences effective with the April 26-27, 2011, meeting. It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, April 26-27, 2011. The meeting adjourned at 2:35 p.m. on March 15, 2011. Notation Vote By notation vote completed on February 15, 2011, the Committee unanimously approved the minutes of the FOMC meeting held on January 25-26, 2011. _____________________________ William B. English Secretary Return to top

2011-02-16

Minute

A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors in Washington, D.C., on Tuesday, January 25, 2011, at 1:00 p.m. and continued on Wednesday, January 26, 2011, at 9:00 a.m. PRESENT: Ben Bernanke, Chairman William C. Dudley, Vice Chairman Elizabeth Duke Charles L. Evans Richard W. Fisher Narayana Kocherlakota Charles I. Plosser Sarah Bloom Raskin Daniel K. Tarullo Kevin Warsh Janet L. Yellen Jeffrey M. Lacker, Dennis P. Lockhart, John F. Moore, and Sandra Pianalto, Alternate Members of the Federal Open Market Committee James Bullard, Thomas M. Hoenig, and Eric Rosengren, Presidents of the Federal Reserve Banks of St. Louis, Kansas City, and Boston, respectively William B. English, Secretary and Economist Deborah J. Danker, Deputy Secretary Matthew M. Luecke, Assistant Secretary David W. Skidmore, Assistant Secretary Michelle A. Smith, Assistant Secretary Scott G. Alvarez, General Counsel Thomas C. Baxter, Deputy General Counsel Nathan Sheets, Economist David J. Stockton, Economist James A. Clouse, Thomas A. Connors, Steven B. Kamin, Loretta J. Mester, Simon Potter, David Reifschneider, Harvey Rosenblum, Daniel G. Sullivan, David W. Wilcox, and Kei-Mu Yi, Associate Economists Brian Sack, Manager, System Open Market Account Patrick M. Parkinson, Director, Division of Banking Supervision and Regulation, Board of Governors Nellie Liang, Director, Office of Financial Stability Policy and Research, Board of Governors William Nelson, Deputy Director, Division of Monetary Affairs, Board of Governors Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors Charles S. Struckmeyer,1 Deputy Staff Director, Office of the Staff Director, Board of Governors Lawrence Slifman and William Wascher, Senior Associate Directors, Division of Research and Statistics, Board of Governors Andrew T. Levin, Senior Adviser, Office of Board Members, Board of Governors Joyce K. Zickler, Visiting Senior Adviser, Division of Monetary Affairs, Board of Governors Daniel M. Covitz, Associate Director, Division of Research and Statistics, Board of Governors Gretchen C. Weinbach, Deputy Associate Director, Division of Monetary Affairs, Board of Governors Beth Anne Wilson,2 Assistant Director, Division of International Finance, Board of Governors Bruce Fallick,2 Group Manager, Division of Research and Statistics, Board of Governors David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors David M. Arseneau, Senior Economist, Division of International Finance, Board of Governors; Stefania D'Amico and Edward M. Nelson, Senior Economists, Division of Monetary Affairs, Board of Governors; Norman J. Morin, Senior Economist, Division of Research and Statistics, Board of Governors Mark A. Carlson, Economist, Division of Monetary Affairs, Board of Governors Randall A. Williams, Records Management Analyst, Division of Monetary Affairs, Board of Governors Patrick K. Barron, First Vice President, Federal Reserve Bank of Atlanta Mark S. Sniderman, Executive Vice President, Federal Reserve Bank of Cleveland David Altig, Alan D. Barkema, Glenn D. Rudebusch, Geoffrey Tootell, and Christopher J. Waller, Senior Vice Presidents, Federal Reserve Banks of Atlanta, Kansas City, San Francisco, Boston, and St. Louis, respectively Julie Ann Remache, Assistant Vice President, Federal Reserve Bank of New York Aysegül Sahin,2 Officer, Federal Reserve Bank of New York R. Jason Faberman2 and Robert L. Hetzel, Senior Economists, Federal Reserve Banks of Philadelphia and Richmond, respectively Annual Organizational Matters In the agenda for this meeting, it was reported that advices of the election of the following members and alternate members of the Federal Open Market Committee for a term beginning January 25, 2011, had been received and that these individuals had executed their oaths of office. The elected members and alternate members were as follows: William C. Dudley, President of the Federal Reserve Bank of New York, with Christine Cumming, First Vice President of the Federal Reserve Bank of New York, as alternate. Charles I. Plosser, President of the Federal Reserve Bank of Philadelphia, with Jeffrey M. Lacker, President of the Federal Reserve Bank of Richmond, as alternate. Charles L. Evans, President of the Federal Reserve Bank of Chicago, with Sandra Pianalto, President of the Federal Reserve Bank of Cleveland, as alternate. Richard W. Fisher, President of the Federal Reserve Bank of Dallas, with Dennis P. Lockhart, President of the Federal Reserve Bank of Atlanta, as alternate. Narayana Kocherlakota, President of the Federal Reserve Bank of Minneapolis, with John F. Moore, First Vice President of the Federal Reserve Bank of San Francisco, as alternate. By unanimous vote, the following officers of the Federal Open Market Committee were selected to serve until the selection of their successors at the first regularly scheduled meeting of the Committee in 2012: Ben Bernanke Chairman William C. Dudley Vice Chairman William B. English Secretary and Economist Deborah J. Danker Deputy Secretary Matthew M. Luecke Assistant Secretary David W. Skidmore Assistant Secretary Michelle A. Smith Assistant Secretary Scott G. Alvarez General Counsel Thomas Baxter Deputy General Counsel Richard M. Ashton Assistant General Counsel Nathan Sheets Economist David J. Stockton Economist James A. Clouse Thomas A. Connors Steven B. Kamin Loretta J. Mester Simon Potter David Reifschneider Harvey Rosenblum Daniel G. Sullivan David W. Wilcox Kei-Mu Yi Associate Economists By unanimous vote, the Federal Reserve Bank of New York was selected to execute transactions for the System Open Market Account. By unanimous vote, Brian Sack was selected to serve at the pleasure of the Committee as Manager, System Open Market Account, on the understanding that his selection was subject to being satisfactory to the Federal Reserve Bank of New York. Secretary's note: Advice subsequently was received that the selection of Mr. Sack as Manager was satisfactory to the Board of Directors of the Federal Reserve Bank of New York. By unanimous vote, the Committee adopted its Program for Security of FOMC Information with amendments to the section on ongoing responsibility for maintaining confidentiality and with a number of technical updates. By unanimous vote, the Authorization for Domestic Open Market Operations was reaffirmed in the form shown below. The Guidelines for the Conduct of System Open Market Operations in Federal-Agency Issues remained suspended. AUTHORIZATION FOR DOMESTIC OPEN MARKET OPERATIONS (Reaffirmed January 25, 2011) 1. The Federal Open Market Committee authorizes and directs the Federal Reserve Bank of New York, to the extent necessary to carry out the most recent domestic policy directive adopted at a meeting of the Committee: A. To buy or sell U.S. government securities, including securities of the Federal Financing Bank, and securities that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the United States in the open market, from or to securities dealers and foreign and international accounts maintained at the Federal Reserve Bank of New York, on a cash, regular, or deferred delivery basis, for the System Open Market Account at market prices, and, for such Account, to exchange maturing U.S. government and federal agency securities with the Treasury or the individual agencies or to allow them to mature without replacement; and B. To buy or sell in the open market U.S. government securities, and securities that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the United States, for the System Open Market Account under agreements to resell or repurchase such securities or obligations (including such transactions as are commonly referred to as repo and reverse repo transactions) in 65 business days or less, at rates that, unless otherwise expressly authorized by the Committee, shall be determined by competitive bidding, after applying reasonable limitations on the volume of agreements with individual counterparties. 2. In order to ensure the effective conduct of open market operations, the Federal Open Market Committee authorizes the Federal Reserve Bank of New York to use agents in agency MBS-related transactions. 3. In order to ensure the effective conduct of open market operations, the Federal Open Market Committee authorizes the Federal Reserve Bank of New York to lend on an overnight basis U.S. government securities and securities that are direct obligations of any agency of the United States, held in the System Open Market Account, to dealers at rates that shall be determined by competitive bidding. The Federal Reserve Bank of New York shall set a minimum lending fee consistent with the objectives of the program and apply reasonable limitations on the total amount of a specific issue that may be auctioned and on the amount of securities that each dealer may borrow. The Federal Reserve Bank of New York may reject bids that could facilitate a dealer's ability to control a single issue as determined solely by the Federal Reserve Bank of New York. 4. In order to ensure the effective conduct of open market operations, while assisting in the provision of short-term investments for foreign and international accounts maintained at the Federal Reserve Bank of New York and accounts maintained at the Federal Reserve Bank of New York as fiscal agent of the United States pursuant to section 15 of the Federal Reserve Act, the Federal Open Market Committee authorizes and directs the Federal Reserve Bank of New York: A. For the System Open Market Account, to sell U.S. government securities, and securities that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the United States, to such accounts on the bases set forth in paragraph 1.A under agreements providing for the resale by such accounts of those securities in 65 business days or less on terms comparable to those available on such transactions in the market; and B. For the New York Bank account, when appropriate, to undertake with dealers, subject to the conditions imposed on purchases and sales of securities in paragraph l.B, repurchase agreements in U.S. government securities, and securities that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the United States, and to arrange corresponding sale and repurchase agreements between its own account and such foreign, international, and fiscal agency accounts maintained at the Bank. Transactions undertaken with such accounts under the provisions of this paragraph may provide for a service fee when appropriate. 5. In the execution of the Committee's decision regarding policy during any intermeeting period, the Committee authorizes and directs the Federal Reserve Bank of New York, upon the instruction of the Chairman of the Committee, to adjust somewhat in exceptional circumstances the degree of pressure on reserve positions and hence the intended federal funds rate and to take actions that result in material changes in the composition and size of the assets in the System Open Market Account other than those anticipated by the Committee at its most recent meeting. Any such adjustment shall be made in the context of the Committee's discussion and decision at its most recent meeting and the Committee's long-run objectives for price stability and sustainable economic growth, and shall be based on economic, financial, and monetary developments during the intermeeting period. Consistent with Committee practice, the Chairman, if feasible, will consult with the Committee before making any adjustment. By unanimous vote, the Authorization for Foreign Currency Operations, the Foreign Currency Directive, and the Procedural Instructions with Respect to Foreign Currency Operations were reaffirmed in the form shown below. The vote to reaffirm these documents included approval of the System's warehousing agreement with the U.S. Treasury. AUTHORIZATION FOR FOREIGN CURRENCY OPERATIONS (Reaffirmed January 25, 2011) 1. The Federal Open Market Committee authorizes and directs the Federal Reserve Bank of New York, for the System Open Market Account, to the extent necessary to carry out the Committee's foreign currency directive and express authorizations by the Committee pursuant thereto, and in conformity with such procedural instructions as the Committee may issue from time to time: A. To purchase and sell the following foreign currencies in the form of cable transfers through spot or forward transactions on the open market at home and abroad, including transactions with the U.S. Treasury, with the U.S. Exchange Stabilization Fund established by section 10 of the Gold Reserve Act of 1934, with foreign monetary authorities, with the Bank for International Settlements, and with other international financial institutions: Australian dollars Brazilian reais Canadian dollars Danish kroner euro Japanese yen Korean won Mexican pesos New Zealand dollars Norwegian kroner Pounds sterling Singapore dollars Swedish kronor Swiss francs B. To hold balances of, and to have outstanding forward contracts to receive or to deliver, the foreign currencies listed in paragraph A above. C. To draw foreign currencies and to permit foreign banks to draw dollars under the reciprocal currency arrangements listed in paragraph 2 below, provided that drawings by either party to any such arrangement shall be fully liquidated within 12 months after any amount outstanding at that time was first drawn, unless the Committee, because of exceptional circumstances, specifically authorizes a delay. D. To maintain an overall open position in all foreign currencies not exceeding $25.0 billion. For this purpose, the overall open position in all foreign currencies is defined as the sum (disregarding signs) of net positions in individual currencies, excluding changes in dollar value due to foreign exchange rate movements and interest accruals. The net position in a single foreign currency is defined as holdings of balances in that currency, plus outstanding contracts for future receipt, minus outstanding contracts for future delivery of that currency, i.e., as the sum of these elements with due regard to sign. 2. The Federal Open Market Committee directs the Federal Reserve Bank of New York to maintain reciprocal currency arrangements ("swap" arrangements) for the System Open Market Account for periods up to a maximum of 12 months with the following foreign banks, which are among those designated by the Board of Governors of the Federal Reserve System under section 214.5 of Regulation N, Relations with Foreign Banks and Bankers, and with the approval of the Committee to renew such arrangements on maturity: Foreign bank Amount of arrangement (millions of dollars equivalent) Bank of Canada 2,000 Bank of Mexico 3,000 Any changes in the terms of existing swap arrangements, and the proposed terms of any new arrangements that may be authorized, shall be referred for review and approval to the Committee. 3. All transactions in foreign currencies undertaken under paragraph 1.A above shall, unless otherwise expressly authorized by the Committee, be at prevailing market rates. For the purpose of providing an investment return on System holdings of foreign currencies or for the purpose of adjusting interest rates paid or received in connection with swap drawings, transactions with foreign central banks may be undertaken at nonmarket exchange rates. 4. It shall be the normal practice to arrange with foreign central banks for the coordination of foreign currency transactions. In making operating arrangements with foreign central banks on System holdings of foreign currencies, the Federal Reserve Bank of New York shall not commit itself to maintain any specific balance, unless authorized by the Federal Open Market Committee. Any agreements or understandings concerning the administration of the accounts maintained by the Federal Reserve Bank of New York with the foreign banks designated by the Board of Governors under section 214.5 of Regulation N shall be referred for review and approval to the Committee. 5. Foreign currency holdings shall be invested to ensure that adequate liquidity is maintained to meet anticipated needs and so that each currency portfolio shall generally have an average duration of no more than 18 months (calculated as Macaulay duration). Such investments may include buying or selling outright obligations of, or fully guaranteed as to principal and interest by, a foreign government or agency thereof; buying such securities under agreements for repurchase of such securities; selling such securities under agreements for the resale of such securities; and holding various time and other deposit accounts at foreign institutions. In addition, when appropriate in connection with arrangements to provide investment facilities for foreign currency holdings, U.S. government securities may be purchased from foreign central banks under agreements for repurchase of such securities within 30 calendar days. 6. All operations undertaken pursuant to the preceding paragraphs shall be reported promptly to the Foreign Currency Subcommittee and the Committee. The Foreign Currency Subcommittee consists of the Chairman and Vice Chairman of the Committee, the Vice Chairman of the Board of Governors, and such other member of the Board as the Chairman may designate (or in the absence of members of the Board serving on the Subcommittee, other Board members designated by the Chairman as alternates, and in the absence of the Vice Chairman of the Committee, the Vice Chairman's alternate). Meetings of the Subcommittee shall be called at the request of any member, or at the request of the Manager, System Open Market Account ("Manager"), for the purposes of reviewing recent or contemplated operations and of consulting with the Manager on other matters relating to the Manager's responsibilities. At the request of any member of the Subcommittee, questions arising from such reviews and consultations shall be referred for determination to the Federal Open Market Committee. 7. The Chairman is authorized: A. With the approval of the Committee, to enter into any needed agreement or understanding with the Secretary of the Treasury about the division of responsibility for foreign currency operations between the System and the Treasury; B. To keep the Secretary of the Treasury fully advised concerning System foreign currency operations, and to consult with the Secretary on policy matters relating to foreign currency operations; C. From time to time, to transmit appropriate reports and information to the National Advisory Council on International Monetary and Financial Policies. 8. Staff officers of the Committee are authorized to transmit pertinent information on System foreign currency operations to appropriate officials of the Treasury Department. 9. All Federal Reserve Banks shall participate in the foreign currency operations for System Account in accordance with paragraph 3G(1) of the Board of Governors' Statement of Procedure with Respect to Foreign Relationships of Federal Reserve Banks dated January 1, 1944. FOREIGN CURRENCY DIRECTIVE (Reaffirmed January 25, 2011) 1. System operations in foreign currencies shall generally be directed at countering disorderly market conditions, provided that market exchange rates for the U.S. dollar reflect actions and behavior consistent with IMF Article IV, Section 1. 2. To achieve this end the System shall: A. Undertake spot and forward purchases and sales of foreign exchange. B. Maintain reciprocal currency ("swap") arrangements with selected foreign central banks. C. Cooperate in other respects with central banks of other countries and with international monetary institutions. 3. Transactions may also be undertaken: A. To adjust System balances in light of probable future needs for currencies. B. To provide means for meeting System and Treasury commitments in particular currencies, and to facilitate operations of the Exchange Stabilization Fund. C. For such other purposes as may be expressly authorized by the Committee. 4. System foreign currency operations shall be conducted: A. In close and continuous consultation and cooperation with the United States Treasury; B. In cooperation, as appropriate, with foreign monetary authorities; and C. In a manner consistent with the obligations of the United States in the International Monetary Fund regarding exchange arrangements under IMF Article IV. PROCEDURAL INSTRUCTIONS WITH RESPECT TO FOREIGN CURRENCY OPERATIONS (Reaffirmed January 25, 2011) In conducting operations pursuant to the authorization and direction of the Federal Open Market Committee as set forth in the Authorization for Foreign Currency Operations and the Foreign Currency Directive, the Federal Reserve Bank of New York, through the Manager, System Open Market Account ("Manager"), shall be guided by the following procedural understandings with respect to consultations and clearances with the Committee, the Foreign Currency Subcommittee, and the Chairman of the Committee, unless otherwise directed by the Committee. All operations undertaken pursuant to such clearances shall be reported promptly to the Committee. 1. The Manager shall clear with the Subcommittee (or with the Chairman, if the Chairman believes that consultation with the Subcommittee is not feasible in the time available): A. Any operation that would result in a change in the System's overall open position in foreign currencies exceeding $300 million on any day or $600 million since the most recent regular meeting of the Committee. B. Any operation that would result in a change on any day in the System's net position in a single foreign currency exceeding $150 million, or $300 million when the operation is associated with repayment of swap drawings. C. Any operation that might generate a substantial volume of trading in a particular currency by the System, even though the change in the System's net position in that currency might be less than the limits specified in 1.B. D. Any swap drawing proposed by a foreign bank not exceeding the larger of (i) $200 million or (ii) 15 percent of the size of the swap arrangement. 2. The Manager shall clear with the Committee (or with the Subcommittee, if the Subcommittee believes that consultation with the full Committee is not feasible in the time available, or with the Chairman, if the Chairman believes that consultation with the Subcommittee is not feasible in the time available): A. Any operation that would result in a change in the System's overall open position in foreign currencies exceeding $1.5 billion since the most recent regular meeting of the Committee. B. Any swap drawing proposed by a foreign bank exceeding the larger of (i) $200 million or (ii) 15 percent of the size of the swap arrangement. 3. The Manager shall also consult with the Subcommittee or the Chairman about proposed swap drawings by the System and about any operations that are not of a routine character. Developments in Financial Markets and the Federal Reserve's Balance Sheet The Manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets during the period since the Federal Open Market Committee (FOMC) met on December 14, 2010. He also reported on System open market operations, including the continuing reinvestment into longer-term Treasury securities of principal payments received on the SOMA's holdings of agency debt and agency-guaranteed mortgage-backed securities (MBS) as well as the ongoing purchases of additional Treasury securities authorized at the November 2–3, 2010, FOMC meeting. Since the first purchase schedule was released after the November FOMC meeting, the Open Market Desk at the Federal Reserve Bank of New York purchased a total of $236 billion of Treasury securities. These purchases included $69 billion associated with the reinvestment of principal payments on agency debt and MBS and $167 billion associated with the expansion of the Federal Reserve's securities holdings. The maturity distribution of the Desk's purchases resulted in an average duration of about 5-1/2 years for the securities obtained. The Manager reported that given the purchases completed thus far, achieving a $600 billion expansion of the SOMA portfolio by the end of June 2011 would require purchasing the additional securities at a pace of about $80 billion per month. In addition, the Manager provided projections of the Federal Reserve's balance sheet and income under alternative assumptions. There were no open market operations in foreign currencies for the System's account over the intermeeting period. By unanimous vote, the Committee ratified the Desk's transactions over the intermeeting period. Structural Unemployment A staff presentation on structural unemployment summarized a broad range of economic research on the topic conducted across the Federal Reserve System. Among the factors cited that could affect the level of structural unemployment were demographics, changes in the intensity of job search and worker screening, differences in the geographic locations of potential workers and vacant jobs, and mismatches in characteristics between potential workers and available jobs. Most of the research reviewed suggested that structural unemployment had likely risen in recent years, but by less than actual unemployment had increased. In discussing the staff presentation, meeting participants mentioned various factors that were seen as influencing the path of the unemployment rate. Several participants noted that estimates of the contributions of the individual factors depended importantly on the approach taken by researchers, including the models used and the assumptions made. Participants noted that many of the factors that contributed to the recent apparent rise in structural unemployment were likely to recede over time. Some participants stressed that certain determinants of the unemployment rate, such as mismatches in the labor market and firms' hiring practices, were both difficult to measure in real time and not directly affected by monetary policy. Others emphasized that in the current situation, monetary policy could still play an important role in reducing unemployment. Staff Review of the Economic Situation The information reviewed at the January 25–26 meeting indicated that the economic recovery was firming, though the expansion had not yet been sufficient to bring about a significant improvement in labor market conditions. Consumer spending rose strongly late last year, and the ongoing expansion in business outlays for equipment and software appeared to have been sustained in recent months. However, construction activity in both the residential and nonresidential sectors remained weak. Industrial production increased solidly in November and December. Modest gains in employment continued, and the unemployment rate remained elevated. Despite further increases in commodity prices, measures of underlying inflation remained subdued and longer-run inflation expectations were stable. The labor market situation continued to improve gradually. Private nonfarm payroll employment increased in December at a pace roughly the same as its average for 2010 as a whole, and the average workweek for all employees was unchanged. Services industries continued to add most of the new jobs in the private sector. Initial claims for unemployment insurance trended lower in December and early January, and some indicators of job openings and firms' hiring plans improved. The unemployment rate decreased to 9.4 percent in December, but this decline in part reflected a further drop in the labor force participation rate. Long-duration unemployment remained elevated, and the employment-to-population ratio was still at a very low level at the end of the year. Total industrial production posted solid increases in November and December, in part because colder weather boosted the output of utilities. Although motor vehicle assemblies dropped back in those months, production in the manufacturing sector outside of motor vehicles posted solid gains that were fairly widespread across industries; as a result, capacity utilization in manufacturing increased further, although it remained below its long-run average. Most indicators of near-term industrial activity, such as the new orders diffusion indexes in the national and regional manufacturing surveys, were at levels consistent with further increases in industrial production in the near term; in addition, motor vehicle production was scheduled to move up again in early 2011. Growth in consumer spending appeared to have picked up in the fourth quarter from the more modest pace seen earlier in the year. Nominal retail sales, excluding purchases of motor vehicles and parts, rose again in December, following substantial increases in the previous four months. In addition, sales of new light motor vehicles climbed further in December after stepping up to a higher level during the preceding two months. The available data suggested that consumer spending was supported by gains in personal income in the fourth quarter of 2010. Moreover, household net worth appeared to have risen in the fourth quarter, as the large increase in equity prices more than offset further declines in house values. Consumer credit started to increase again in October and November after having generally declined since the fall of 2008. However, consumer sentiment only edged up, on net, in December and early January, and it was still at a relatively subdued level. Activity in the housing market remained weak in an environment characterized by soft demand, a large inventory of foreclosed or distressed properties on the market, and tight credit conditions for construction loans and mortgages. Starts and permits for new single-family homes in November and December were still near the very low levels recorded since midyear. Sales of new homes rose in December but remained historically low. Sales of existing homes increased in November and December from the more depressed levels seen during the summer and early autumn, but these sales stayed relatively weak as well. Moreover, measures of house prices declined further in recent months, and survey responses indicated that households remained concerned that home values might continue to fall. Real business investment in equipment and software appeared to have increased further in the fourth quarter, although likely at a more moderate rate than in the first three quarters of 2010. After declining in October, nominal orders and shipments of nondefense capital goods excluding aircraft rose in November, and the level of new orders remained above the level of shipments, indicating that the backlog of unfilled orders was still rising. Available indicators suggested that business purchases of software stayed on a solid uptrend, and outlays for computing and communications equipment appeared to have risen briskly. However, business spending for transportation equipment, including aircraft and motor vehicles, likely declined in the fourth quarter of 2010 after expanding rapidly earlier in the year. Surveys of purchasing managers reported that firms planned to increase their capital spending this year. Reports on planned capital expenditures by small businesses showed some signs of improvement in recent months, although they remained relatively subdued. Business outlays for nonresidential structures stayed weak, reflecting high vacancy rates and low property values for office and commercial properties, as well as tight credit conditions for commercial real estate. In contrast, investment in drilling and mining structures increased, buoyed by rising energy prices. Real nonfarm inventory investment appeared to have slowed substantially in the fourth quarter after a sizable increase in the previous quarter. Much of the fourth-quarter downswing was likely associated with a drawdown of motor vehicle stocks after an accumulation in the third quarter. Book-value data for October and November suggested that the pace of inventory accumulation also was slowing outside of the motor vehicle sector. Inventory-to-sales ratios toward the end of 2010 were close to their pre-recession norms, and most purchasing managers surveyed in December reported that their customers' inventories were not too high. Measures of underlying consumer price inflation remained low. In December, the core consumer price index (CPI) edged up, as goods prices were unchanged and prices of non-energy services rose slightly. The 12-month change in the core CPI remained near the very low readings of the previous two months. Other measures of underlying inflation, such as the trimmed-mean and median CPIs, also remained subdued. Despite the steep run-up in agricultural commodity prices over the second half of last year, increases in retail food prices remained modest. However, consumer energy prices moved up sharply in December, and prices of most types of crude oil increased during December and into January. The prices of nonfuel industrial commodities also continued to rise over the intermeeting period. In December and early January, survey measures of households' long-term inflation expectations stayed in the range that has prevailed for some time. Available measures of labor compensation showed that labor cost pressures were still restrained, as wage increases slowed along with inflation and productivity gains appeared to remain substantial. The 12-month change in average hourly earnings for all employees continued to be low in December. The U.S. international trade deficit narrowed slightly in November, as both nominal exports and imports moved up by almost the same amount. The increase in exports was driven by agricultural goods, in part reflecting higher prices, as well as by consumer goods. In contrast, exports of machinery and automotive products fell, reversing their October gains. The rise in imports reflected an increase in the value of imported petroleum products, mostly explained by higher prices, and of capital goods, which was supported importantly by a jump in computers. At the same time, noticeable decreases were registered for imports of automotive products, services, and consumer goods, which were primarily due to pharmaceuticals. These developments, combined with the substantial narrowing in the trade deficit in October, implied that the trade deficit likely shrank considerably in the fourth quarter of 2010. Recent indicators of foreign economic activity suggested that the global recovery was strengthening. Much of this strength was centered in the emerging market economies (EMEs), where widespread increases in exports and in manufacturing purchasing managers indexes (PMIs) pointed to a resurgence in economic growth following a slowdown in the third quarter of 2010. For China and Singapore, real gross domestic product (GDP) data for the fourth quarter confirmed a rebound in economic growth. In contrast, the rise in economic activity in the advanced foreign economies (AFEs) remained at a subdued pace. In the euro area, the incoming economic data were mixed: Industrial production, manufacturing PMIs, and industrial confidence firmed, but retail sales and consumer confidence softened. The data also pointed to an uneven expansion across the euro area, suggesting that economic growth in Germany continued to outpace that in the euro-area periphery. In Japan, exports and household spending were soft, although industrial production firmed. Foreign inflation picked up noticeably in the fourth quarter of 2010, mostly because of an acceleration of energy and food prices. Measures of core inflation remained much more subdued, although they also moved up in some countries. In the EMEs, concerns about inflation prompted a number of central banks to tighten policy. Some EMEs reportedly took steps to limit the appreciation of their currencies by intervening in foreign exchange markets, and some acted to discourage capital inflows. Staff Review of the Financial Situation The decision by the FOMC at its December meeting to maintain the 0 to 1/4 percent target range for the federal funds rate was widely anticipated. Both the accompanying statement and the minutes of the meeting were broadly in line with market expectations and elicited limited price action in financial markets. Yields on medium- and longer-term nominal Treasury securities increased slightly, on net, over the intermeeting period. Yields rose in response to data releases that generally pointed to some firming of the economic recovery, but the upward pressure on yields apparently was tempered by expectations of only a gradual pace of improvement in the labor market, the belief that the Federal Reserve was likely to maintain an accommodative policy stance, and ongoing concerns about fiscal and banking pressures in the euro area. Futures quotes indicated that the expected path for the federal funds rate did not change appreciably over the intermeeting period. Market-based measures of uncertainty about longer-term Treasury yields, which had risen ahead of year-end, declined on balance, likely in part reflecting solidifying market expectations regarding the ultimate size of the FOMC's asset purchase program. The purchases of longer-term Treasury securities by the Desk during the intermeeting period reportedly had no significant effects on measures of day-to-day Treasury market functioning. Inflation compensation over the next 5 years based on Treasury inflation-protected securities (TIPS) moved up, likely pushed higher by rising prices for oil and other commodities and by the firming of the economic outlook. Further out, TIPS-based inflation compensation 5 to 10 years ahead edged down slightly on net. Yields on investment-grade corporate bonds were little changed over the intermeeting period, while those on speculative-grade corporate bonds declined a little, leaving both investment- and speculative-grade spreads over yields on comparable-maturity Treasury securities somewhat narrower. In the secondary market for leveraged loans, the average bid price moved up further over the intermeeting period. The municipal bond market appeared to continue to price in an atypically high level of default risk. The ratios of yields on long-term general obligation bonds to those on comparable-maturity Treasury securities moved up to a very high level. Despite these strains, gross issuance of long-term municipal bonds remained strong in December. Conditions in short-term funding markets remained stable over the intermeeting period. Spreads of dollar London interbank offered rates, or Libor, over overnight index swap rates held fairly steady across the term structure, as the year-end passed without incident. Some modest year-end pressures were observed in repurchase agreement markets, but they dissipated by early January. On net, spreads on unsecured nonfinancial commercial paper remained low, and spreads on asset-backed commercial paper appeared to have stabilized after having been somewhat volatile across year-end. Anecdotal reports suggested that the modestly rising trend in the use of dealer-intermediated leverage evident in 2010 had continued into 2011, but information from a variety of sources indicated that leverage remained well below the levels reached before the crisis. Broad U.S. stock price indexes rose, on net, over the intermeeting period, extending their recent strong performance; bank stock prices modestly outperformed the broader market. The increase in equity prices reflected the apparent firming of the economic recovery and favorable early reports on fourth-quarter corporate earnings. Option-implied volatility on the S&P 500 index remained at a relatively low level. The spread between the staff's estimate of the expected real equity return for S&P 500 firms and the real 10-year Treasury yield--a rough measure of the equity risk premium--narrowed further over the period but remained elevated relative to longer-run norms. Overall, net debt financing by U.S. nonfinancial corporations was robust in the fourth quarter of 2010. Net issuance of bonds was particularly strong, supported by heavy issuance in both the speculative- and investment-grade sectors. Meanwhile, nonfinancial commercial paper outstanding decreased slightly over the quarter. Issuance of syndicated leveraged loans, especially those funded by institutional investors, stayed strong. Measures of the credit quality of nonfinancial corporations continued to improve. Gross public equity issuance by nonfinancial firms dropped back in December to its average pace in 2010. Financing conditions for most types of commercial real estate remained tight over the intermeeting period, and delinquency rates for broad categories of commercial real estate loans stayed elevated. However, for larger nonresidential properties in strong markets, credit appeared to have become somewhat less restricted, and prices moved up, on net, from their lows at the beginning of 2010; at the same time, prices of other nonresidential properties continued to trend down. Issuance of commercial mortgage-backed securities increased in the fourth quarter of 2010 but was still only a fraction of its pre-crisis level. Rates on conforming fixed-rate residential mortgages edged down a bit during the intermeeting period after having risen appreciably in November and early December, leaving their spreads over the 10-year Treasury yield down slightly. Refinancing activity, which had fallen in response to the increase in mortgage rates in November, remained at a low level during the period. Outstanding residential mortgage debt declined further in the third quarter of 2010, reflecting weak housing activity and tight lending standards. Serious delinquency rates on prime and subprime mortgages flattened out in October and November after having moved down earlier in the year. Signs of improvement were evident in the consumer credit market, where issuance of consumer asset-backed securities was strong early in the fourth quarter. In addition, delinquency rates on consumer loans continued to trend down toward their longer-run norms. Banks made a sizable reduction in their holdings of securities in December. Core loans on banks' books--the sum of commercial and industrial (C&I), real estate, and consumer loans--edged down again, but the rate of contraction appeared to be abating. C&I loans expanded at a robust pace in December. Despite continued weakness in many residential real estate indicators, closed-end residential mortgage loans held by large banks rose noticeably for the fifth consecutive month in December. By contrast, commercial real estate loans, home equity loans, and consumer loans decreased during that month. The behavior of the components of core loans in recent months was broadly consistent with the results of the Senior Loan Officer Opinion Survey on Bank Lending Practices conducted in January. The survey responses indicated that, during the fourth quarter of 2010, modest net fractions of banks continued to ease standards for C&I loans and that larger net fractions eased some terms on such loans. Changes in banks' lending policies for other categories of loans were reportedly mixed and generally small. Meanwhile, moderate net fractions of respondents indicated that demand for C&I loans had strengthened over the preceding three months, and that inquiries from business borrowers for new or increased credit lines had picked up. In contrast, demand reportedly weakened somewhat, on balance, for residential real estate loans and was little changed for consumer loans. Respondents indicated that the recent increase in their holdings of closed-end residential mortgage loans reflected the relative attractiveness of such loans compared with other assets and, for some, a desire to expand their balance sheets by adding to this loan category. In December, M2 expanded at a rate a bit below its pace in November. Liquid deposits, the largest component of M2, continued to increase rapidly, while the contraction in small time deposits and retail money market mutual funds persisted. The ongoing compositional shift within M2 toward liquid deposits likely reflected the relatively high yields on liquid deposits compared with yields on many other components of M2. Currency growth slowed in December, due in part to weather-related transportation difficulties that delayed flows of U.S. bank notes to international destinations. The broad nominal index of the U.S. dollar declined more than 1 percent over the intermeeting period, depreciating by roughly similar amounts, on average, against the currencies of the AFEs and the EMEs. The dollar's decline appeared to reflect a variety of factors: signs of stronger economic activity abroad, particularly in the EMEs; actual and prospective monetary policy tightening in foreign economies; and increases in the prices of oil and other commodities, which lent support to the currencies of commodity-exporting countries. Benchmark 10-year sovereign yields moved higher in the core euro-area economies and the United Kingdom but were little changed in Japan and Canada. Equity prices increased in the AFEs and in many EMEs as market participants appeared to revise upward their outlook for the global economy. Financial market strains in the euro area continued during the intermeeting period. Greek, Irish, and Portuguese sovereign debt spreads over German bunds rose in December and early January as credit rating agencies downgraded the sovereign debt of Ireland and Portugal. Subsequently, though, spreads narrowed following some relatively successful sovereign debt auctions by countries in the euro-area periphery, evidence of stepped-up purchases of peripheral sovereign bonds by the European Central Bank (ECB), and reports that the European Union was considering expanding the backstop capacity of the European Financial Stability Facility. Some modest dollar funding pressures developed as year-end approached, but they did not persist into January. To continue to support liquidity conditions in global money markets, on December 21, the Federal Reserve announced an extension through August 1, 2011, of its swap line arrangements with the ECB and the central banks of Japan, Canada, Switzerland, and the United Kingdom. In addition, the Bank of England established a temporary liquidity swap facility with the ECB designed to provide Ireland's central bank with sterling to help meet the potential needs of the Irish banking system. Staff Economic Outlook Because the incoming data on production and spending were stronger, on balance, than the staff's expectations at the time of the December FOMC meeting, the near-term forecast for the increase in real GDP was revised up. However, the staff's outlook for the pace of economic growth over the medium term was adjusted only slightly relative to the projection prepared for the December meeting. Compared with the December forecast, the conditioning assumptions underlying the forecast were little changed and roughly offsetting: Although higher equity prices and a lower foreign exchange value of the dollar were expected to be slightly more supportive of economic growth, the staff anticipated that these influences would be about offset by lower house prices and higher oil prices. In addition, the staff's assumptions about fiscal policy changed little--the fiscal package enacted in December was close to what the staff had already incorporated in their previous projection. In the medium term, the recovery in economic activity was expected to receive support from accommodative monetary policy, further improvements in financial conditions, and greater household and business confidence. Over the projection period, the rise in real GDP was expected to be sufficient to slowly reduce the rate of unemployment, but the jobless rate was anticipated to remain elevated at the end of 2012. The underlying rate of consumer price inflation in recent months was in line with what the staff anticipated at the time of the December meeting, and the staff continued to project that increases in core PCE prices would remain subdued in 2011 and 2012. As in previous projections, the persistent wide margin of economic slack in the forecast was expected to maintain downward pressure on inflation, but this influence was anticipated to be counterbalanced by the continued stability of inflation expectations and by increases in the prices of imported goods. The staff anticipated that brisk increases in energy prices would raise total consumer price inflation above core inflation this year, but that upward pressure from energy prices would wane by next year. Participants' Views on Current Conditions and the Economic Outlook In conjunction with this FOMC meeting, all meeting participants--the six members of the Board of Governors and the presidents of the 12 Federal Reserve Banks--provided projections of output growth, the unemployment rate, and inflation for each year from 2011 through 2013 and over the longer run. Longer-run projections represent each participant's assessment of the rate to which each variable would be expected to converge, over time, under appropriate monetary policy and in the absence of further shocks. Participants' forecasts are described in the Summary of Economic Projections, which is attached as an addendum to these minutes. In the discussion of intermeeting developments and their implications for the outlook, the participants generally expressed greater confidence that the economic recovery would be sustained and would gradually strengthen over coming quarters. Their more positive assessment reflected both the tenor of the incoming economic data and information received from business contacts since the previous meeting. Spending by households picked up noticeably in the fourth quarter, business outlays continued to grow at a moderate pace, and conditions in labor and financial markets improved somewhat over the intermeeting period. Although business contacts remained somewhat cautious about the economic outlook, they generally indicated greater optimism regarding their own prospects for sales and hiring than at the time of the previous meeting. While participants viewed the downside risks to their forecasts of economic activity over the projection period as having diminished, their assessment of the most likely outcomes for economic activity and inflation over the projection period was not greatly changed. Most participants raised their forecast of real GDP growth in 2011 somewhat and continued to anticipate stronger growth this year than in 2010, with a further gradual acceleration during 2012 and 2013. The unemployment rate was still projected to decline gradually over the forecast period but to remain elevated. Total inflation was still expected to remain subdued, and core inflation was projected to trend up slowly over the next few years as economic activity picks up but inflation expectations remain well anchored. Participants' judgment that the economic recovery was on a firmer footing was supported by the strength in household spending in the fourth quarter. The incoming data indicated that households stepped up sharply their purchases of durable goods, particularly automobiles, last quarter. Spending on luxury goods also increased, and the pace of holiday sales was better than in recent years. However, some participants noted that it was not clear whether the recent pace of consumer spending would be sustained. On the one hand, the additional spending could reflect pent-up demand following the downturn or greater confidence on the part of households about the future, in which case it might be expected to continue. On the other hand, the additional spending could prove short lived given that a good portion of it appeared to have occurred in relatively volatile categories such as autos. Activity in the business sector also indicated that the economic recovery remained on track. For instance, indicators of business investment in equipment and software continued to rise. Industrial production posted solid gains, supported in part by U.S. exports that appeared to have been noticeably stronger in the fourth quarter. A wide range of business contacts expressed cautious optimism about the durability and strength of the recovery, and some were planning for an expansion in production in order to meet an anticipated rise in sales. In addition, although residential construction spending remained weak, spending on commercial construction projects showed some tentative signs of bottoming out. Participants noted that conditions in labor markets continued to improve gradually. Payroll employment increased at a modest pace, and, although the data had been somewhat erratic, a slight downward trend was apparent in the recent pattern of weekly initial claims for unemployment insurance. In addition, some surveys of employers suggested a somewhat more upbeat outlook for employment. Business contacts provided a range of information regarding hiring intentions, with some indicating that workers at all skill levels were readily obtainable, while others reported that they had upgraded skill requirements and that some of the currently unemployed did not meet those new requirements. Some businesses remained reluctant to add permanent positions and were planning to meet their labor requirements with temporary workers. Overall, meeting participants continued to express disappointment in both the pace and the unevenness of the improvements in labor markets and noted that they would monitor labor market developments closely. Conditions in financial markets improved somewhat further over the intermeeting period. Broad equity prices rose, adding to their substantial gains since the middle of 2010. Yields on longer-term nominal Treasury securities were little changed, on balance, over the period, but they had increased quite a bit in recent months, leaving the Treasury yield curve noticeably steeper. Some participants noted that a steep yield curve is a typical feature of an economy in recovery, and that much of the steepening appeared to have occurred in response to stronger-than-expected economic data. Market-based measures of inflation compensation over the next few years increased further over the intermeeting period, extending the rise that occurred over recent months. Some participants suggested that the increase likely reflected, in part, a decline in investors' perceptions of the near-term risk of further disinflation. At the same time, longer-term inflation expectations had remained stable. Credit spreads on the debt of nonfinancial corporations continued to narrow over the period, reaching levels noticeably lower than those posted several months ago, with the largest declines coming on speculative-grade bonds. However, credit conditions remained tight for smaller, bank-dependent firms, although bank loan growth had clearly picked up in some sectors. Some participants noted that, taken together, these financial developments were consistent with a more accommodative stance of monetary policy since last summer or a reduction in risk aversion on the part of market participants. Meeting participants noted that headline inflation had been boosted by higher prices for energy and other commodities, as well as by increases in the prices of imported goods. Some participants indicated that while unit labor costs generally had declined and profit margins were wide, the higher commodity prices were boosting costs of production for many firms. Some business contacts indicated that they were going to try to pass a portion of these higher costs through to their customers but were uncertain about whether that would be possible given current market conditions. Many participants expected that, with significant slack in resource markets and longer-term inflation expectations stable, measures of core inflation would remain close to current levels in coming quarters. However, the importance of resource slack as a factor influencing inflation was debated, and some participants suggested that other variables, such as current and expected rates of economic growth, could be useful indicators of inflation pressures. Overall, most participants indicated that the somewhat better-than-expected economic data and anecdotal information from business contacts had importantly increased their confidence in the continuation of a moderate recovery in activity this year. Accordingly, participants generally agreed that the downside risks to their forecasts of both economic growth and inflation--as well as the odds of a period of deflation--had diminished. Participants also generally agreed that the recent data had not led them to significantly change their outlooks for the most likely rates of economic growth and inflation in coming quarters. Participants noted that some of the strength in the recent data reflected factors that could prove temporary, such as the large contribution from net exports, a volatile category, and the sharp step-up in auto sales. Most participants continued to anticipate that the recovery in economic activity was likely to be restrained by a variety of economic factors, including still-high unemployment, modest income growth, lower housing wealth, high rates of mortgage foreclosure, elevated inventories of unsold homes, and tight credit conditions in a number of sectors. In addition, although many business contacts expressed more optimism about the economic recovery, a number had aimed their recent investments primarily at enhancing productivity rather than expanding employment, and hiring for some businesses reportedly was focused on temporary workers. Some participants noted that incoming data on production, spending, and employment would need to be solid for a while longer to justify a significant upward revision to their outlook for the likely pace of the recovery. Participants generally saw the risks to their outlook for economic growth and employment as having become broadly balanced, but they continued to see significant risks to both sides of the outlook. On the downside, participants remained worried about the possible effects of spillovers from the banking and fiscal strains in peripheral Europe, the ongoing fiscal adjustments by U.S. state and local governments, and the continued weakness in the housing market. On the upside, the recent strength in household spending raised the possibility that domestic final demand could snap back more rapidly than anticipated. If so, a considerably stronger recovery could take hold, more in line with the sorts of recoveries seen following deep economic recessions in the past. Regarding risks to the inflation outlook, some participants noted that increases in energy and other commodity prices as well as in the prices of imported goods from EMEs posed upside risks. Others, however, noted that the pass-through from increases in commodity prices to broad measures of consumer price inflation in the United States had generally been fairly small. Some participants expressed concern that in a situation in which businesses had been unable to raise prices in response to higher costs for some time, firms might increase them substantially once they found themselves with sufficient pricing power. In any case, the factors affecting the ability of businesses to pass through higher prices to consumers were viewed as complex and hard to monitor in real time. Most participants saw the large degree of resource slack in the economy as likely to remain a force restraining inflation, and while the risk of further disinflation had declined, a number of participants cited concerns that inflation was below its mandate-consistent level and was expected to remain so for some time. Finally, some participants noted that if the very large size of the Federal Reserve's balance sheet led the public to doubt the Committee's ability to withdraw monetary accommodation when doing so becomes appropriate, the result could be upward pressure on inflation expectations and so on actual inflation. To mitigate such risks, it was noted that the Committee should continue its planning for the eventual exit from the current exceptionally accommodative stance of policy. Committee Policy Action In their discussion of monetary policy for the period ahead, members agreed that no changes to the Committee's asset purchase program or to its target range for the federal funds rate were warranted at this meeting. While the information received over the intermeeting period increased members' confidence in the sustainability of the economic recovery, the pace of the recovery was insufficient to bring about a significant improvement in labor market conditions, and measures of underlying inflation had trended downward. Moreover, the economic projections submitted for this meeting indicated that unemployment was expected to remain above, and inflation to remain somewhat below, levels consistent with the Committee's objectives for some time. Accordingly, the Committee agreed to continue to expand its holdings of longer-term Treasury securities as announced in November in order to promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with the Committee's mandate. The Committee decided to maintain its existing policy of reinvesting principal payments from its securities holdings and reaffirmed its intention to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011. A few members remained unsure of the likely effects of the asset purchase program on the economy, but felt that making changes to the program at this time was not appropriate. Members emphasized that the Committee would continue to regularly review the pace of its securities purchases and the overall size of the asset purchase program in light of incoming information--including information on the outlook for economic activity, developments in financial markets, and the efficacy of the purchase program and any unintended consequences that might arise--and would adjust the program as needed to best foster maximum employment and price stability. A few members noted that additional data pointing to a sufficiently strong recovery could make it appropriate to consider reducing the pace or overall size of the purchase program. However, others pointed out that it was unlikely that the outlook would change by enough to substantiate any adjustments to the program before its completion. In addition, the Committee reiterated its expectation that economic conditions were likely to warrant exceptionally low levels for the federal funds rate for an extended period. With respect to the statement to be released following the meeting, members agreed that only small changes were necessary to reflect the improvement in the near-term economic outlook and to make clear that the policy decision reflected a continuation of the asset purchase program announced in November. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to execute purchases of longer-term Treasury securities in order to increase the total face value of domestic securities held in the System Open Market Account to approximately $2.6 trillion by the end of June 2011. The Committee also directs the Desk to reinvest principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability." The vote encompassed approval of the statement below to be released at 2:15 p.m.: "Information received since the Federal Open Market Committee met in December confirms that the economic recovery is continuing, though at a rate that has been insufficient to bring about a significant improvement in labor market conditions. Growth in household spending picked up late last year, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, while investment in nonresidential structures is still weak. Employers remain reluctant to add to payrolls. The housing sector continues to be depressed. Although commodity prices have risen, longer-term inflation expectations have remained stable, and measures of underlying inflation have been trending downward. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been disappointingly slow. To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to continue expanding its holdings of securities as announced in November. In particular, the Committee is maintaining its existing policy of reinvesting principal payments from its securities holdings and intends to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate." Voting for this action: Ben Bernanke, William C. Dudley, Elizabeth Duke, Charles L. Evans, Richard W. Fisher, Narayana Kocherlakota, Charles I. Plosser, Sarah Bloom Raskin, Daniel K. Tarullo, Kevin Warsh, and Janet L. Yellen. Voting against this action: None. Next, the Committee turned to a discussion of its external communications, specifically the importance of communicating both broadly and effectively. FOMC participants noted the importance of fair and equal access by the public to information that could be informative about future policy decisions, and they considered approaches to address this issue. Several participants noted that increased clarity of communications was a key objective, and some referred to the central role of communications in the monetary policy transmission process. A focus of the discussion was on how to encourage dialogue with the public in an appropriate and transparent manner. The subcommittee on communications agreed to consider whether further guidance in this area would be useful. It was agreed that the next meeting of the Committee would be held on Tuesday, March 15, 2011. The meeting adjourned at 2:40 p.m. on January 26, 2011. Notation Vote By notation vote completed on January 3, 2011, the Committee unanimously approved the minutes of the FOMC meeting held on December 14, 2010. _____________________________ William B. English Secretary 1. Attended Wednesday's session only. Return to text 2. Attended Tuesday's session only. Return to text   Return to top

2011-01-26

Statement

Information received since the Federal Open Market Committee met in December confirms that the economic recovery is continuing, though at a rate that has been insufficient to bring about a significant improvement in labor market conditions. Growth in household spending picked up late last year, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, while investment in nonresidential structures is still weak. Employers remain reluctant to add to payrolls. The housing sector continues to be depressed. Although commodity prices have risen, longer-term inflation expectations have remained stable, and measures of underlying inflation have been trending downward. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been disappointingly slow. To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to continue expanding its holdings of securities as announced in November. In particular, the Committee is maintaining its existing policy of reinvesting principal payments from its securities holdings and intends to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate. Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Richard W. Fisher; Narayana Kocherlakota; Charles I. Plosser; Sarah Bloom Raskin; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

2011-01-04

Minute

A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors in Washington, D.C., on Tuesday, December 14, 2010, at 8:30 a.m. PRESENT: Ben Bernanke, Chairman William C. Dudley, Vice Chairman James Bullard Elizabeth Duke Thomas M. Hoenig Sandra Pianalto Sarah Bloom Raskin Eric Rosengren Daniel K. Tarullo Kevin Warsh Janet L. Yellen Christine Cumming, Charles L. Evans, Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, Alternate Members of the Federal Open Market Committee Jeffrey M. Lacker and Dennis P. Lockhart, Presidents of the Federal Reserve Banks of Richmond and Atlanta, respectively John F. Moore, First Vice President, Federal Reserve Bank of San Francisco William B. English, Secretary and Economist Deborah J. Danker, Deputy Secretary Matthew M. Luecke, Assistant Secretary David W. Skidmore, Assistant Secretary Michelle A. Smith, Assistant Secretary Scott G. Alvarez, General Counsel Nathan Sheets, Economist David J. Stockton, Economist Alan D. Barkema, James A. Clouse, Thomas A. Connors, Jeff Fuhrer, Steven B. Kamin, Lawrence Slifman, Christopher J. Waller, and David W. Wilcox, Associate Economists Brian Sack, Manager, System Open Market Account Patrick M. Parkinson, Director, Division of Bank Supervision and Regulation, Board of Governors Nellie Liang, Director, Office of Financial Stability Policy and Research, Board of Governors William Nelson, Deputy Director, Division of Monetary Affairs, Board of Governors Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors Charles S. Struckmeyer, Deputy Staff Director, Office of the Staff Director, Board of Governors David Reifschneider and William Wascher, Senior Associate Directors, Division of Research and Statistics, Board of Governors Andrew T. Levin, Senior Adviser, Office of Board Members, Board of Governors Michael G. Palumbo and Joyce K. Zickler, Deputy Associate Directors, Division of Research and Statistics, Board of Governors; Gretchen C. Weinbach, Deputy Associate Director, Division of Monetary Affairs, Board of Governors Fabio M. Natalucci, Assistant Director, Division of Monetary Affairs, Board of Governors Randall A. Williams, Records Management Analyst, Division of Monetary Affairs, Board of Governors Dale Roskom, First Vice President, Federal Reserve Bank of Cleveland Harvey Rosenblum, Daniel G. Sullivan, and John C. Williams, Executive Vice Presidents, Federal Reserve Banks of Dallas, Chicago, and San Francisco, respectively David Altig, Richard P. Dzina, Mark E. Schweitzer, and Kei-Mu Yi, Senior Vice Presidents, Federal Reserve Banks of Atlanta, New York, Cleveland, and Minneapolis, respectively Tobias Adrian, Vice President, Federal Reserve Bank of New York Satyajit Chatterjee, Senior Economic Adviser, Federal Reserve Bank of Philadelphia Alexander L. Wolman, Senior Economist, Federal Reserve Bank of Richmond Developments in Financial Markets and the Federal Reserve's Balance Sheet The manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets since the Federal Open Market Committee (FOMC) met on November 2-3, 2010. He also reported on System open market operations, including the continuing reinvestment into longer-term Treasury securities of principal payments received on the SOMA's holdings of agency debt and agency-guaranteed mortgage-backed securities (MBS) as well as the ongoing purchases of additional Treasury securities authorized at the November 2-3 FOMC meeting. Since the last meeting, the Open Market Desk at the Federal Reserve Bank of New York purchased a total of about $105 billion of Treasury securities, reflecting about $30 billion of purchases with the proceeds of principal payments and about $75 billion as part of the authorized expansion of the Federal Reserve's securities holdings. Purchases were concentrated in nominal Treasury securities with maturities of 2 to 10 years, though some longer-term securities were purchased along with some Treasury inflation-protected securities (TIPS). The Manager also discussed the Desk's intention to place additional limits on its purchases of individual securities, as the Federal Reserve's holdings of such securities increased beyond 35 percent of the total outstanding; these limits were intended to help ensure that Federal Reserve purchases do not impair the liquidity in Treasury markets. In addition, the Manager updated the Committee on the SOMA's holdings of foreign-currency instruments. There were no open market operations in foreign currencies for the System's account over the intermeeting period. By unanimous vote, the Committee ratified the Desk's transactions over the intermeeting period. In light of ongoing strains in some foreign financial markets, the Committee considered a proposal to extend its dollar liquidity swap arrangements with foreign central banks past January 31, 2011. After discussing possible alternative periods for such an extension, the Committee unanimously approved the following resolution: The Federal Open Market Committee directs the Federal Reserve Bank of New York to extend the existing temporary reciprocal currency arrangements ("swap arrangements") for the System Open Market Account with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank. The swap arrangements shall now terminate on August 1, 2011, unless further extended by the Committee. Staff Review of the Economic Situation The information reviewed at the December 14 meeting indicated that economic activity was increasing at a moderate rate, but that the unemployment rate remained elevated. The pace of consumer spending picked up in October and November, exports rose rapidly in October, and the recovery in business spending on equipment and software (E&S) appeared to be continuing. In contrast, residential and nonresidential construction activity was still depressed. Manufacturing production registered a solid gain in October. Nonfarm businesses continued to add workers in October and November, and the average workweek moved up. Longer-run inflation expectations were stable, but core inflation continued to trend lower. Labor demand rose further in recent months, but unemployment stayed at a high level. The average increase in private nonfarm payroll employment in October and November was close to the pace over the preceding six months, while the average workweek for all employees edged higher. The bulk of the private-sector job gains continued to be in the services industries; employment in manufacturing, construction, and retail trade declined, on average, in October and November. Employment at state and local governments rose slightly over the two-month period. A number of indicators of job openings and hiring plans improved in October and November, and initial claims for unemployment insurance trended steadily lower through November and early December. However, the unemployment rate, which remained at 9.6 percent during the preceding three months, increased to 9.8 percent in November, while the labor force participation rate and the employment-population ratio remained depressed. Industrial production in the manufacturing sector increased at a solid pace in October, with advances widespread across industries; total industrial production was unchanged due to an offsetting weather-related drop in the output of utilities. The manufacturing capacity utilization rate continued to move up in October, although it remained significantly below its 1972-2009 average. Most indicators of near-term industrial activity, such as the new orders diffusion indexes in the national and regional manufacturing surveys, were at levels consistent with moderate gains in industrial production in the near term. Motor vehicle assemblies, which rose in October, fell back in November but were scheduled to move up again in coming months. The pace of consumer spending picked up in recent months from the modest rate that prevailed earlier in the year. Nominal retail sales, excluding purchases at motor vehicles and parts outlets, posted a strong gain in November, and revised estimates showed larger increases in September and October than previously reported. In addition, sales of new light motor vehicles stepped up in October and remained at that higher level in November. A number of factors supporting consumer spending also improved. Revised data on personal income indicated that it was stronger last spring and summer than previously reported. Household net worth rose further in the third quarter, as an increase in equity values more than offset the effect of a drop in house prices. Consumer sentiment turned more positive in November and early December, retracing most of the decline that occurred during the summer. However, while consumer credit outstanding showed signs of stabilizing after two years of runoffs, credit terms were still noticeably less favorable than in the past, and demand for credit appeared to remain weak. Activity in the housing market was still quite depressed. In October, starts of new single-family homes remained at the very low level that had prevailed since August. Moreover, the level of permit issuance, which is typically a near-term indicator of new homebuilding, continued to run below starts. The persistence of a large excess supply of existing homes on the market and tight credit conditions for construction appeared to constitute a significant restraint on new homebuilding. Demand for housing also remained very weak: Sales of new homes in October were at the lowest level in the 48-year history of the series. Purchases of existing homes edged lower in October; in part, the still-low level of sales likely reflected the payback from the earlier surge in sales associated with the homebuyer tax credit and also the moratoriums on sales of bank-owned properties. Measures of house prices declined recently, and households' concerns that home values might continue to fall, their pessimism about the outlook for employment and income, and the tight standards faced by many mortgage borrowers appeared to be weighing on demand. Real business investment in equipment and software appeared to be increasing, although the pace of spending seemed to have moderated from the rapid rate of the first half of the year. The rise in E&S spending during the third quarter, while somewhat slower than earlier in the year, remained solid and broad based, but the available data for the fourth quarter were mixed. Nominal orders and shipments of nondefense capital goods excluding aircraft declined in October, and business purchases of new vehicles in October and November were down a bit from their third-quarter level. In contrast, sales of software still appeared to be on a solid uptrend, and deliveries of completed aircraft picked up in November. Surveys of purchasing managers reported plans to step up capital spending in 2011; however, reports from small businesses on their planned expenditures remained downbeat. Business outlays on nonresidential structures appeared to be declining further, with a drop in spending on building construction offset only slightly by increased investment in drilling and mining structures. Overall borrowing by nonfinancial corporations was robust again in November, indicators of credit quality continued to improve, and small businesses noted some easing in credit availability. However, financing conditions for commercial real estate remained tight. Real inventory investment rose sharply in the third quarter, but book-value data for October suggested that the pace of accumulation was slowing. Although inventory-sales ratios rose during the third quarter, survey data implied that few businesses perceived inventory stocks as being too high. Consumer price inflation trended lower in October. The 12-month change in the total personal consumption expenditures (PCE) price index reached its lowest level of the past year; the 12-month change in the PCE price index for core goods and services also moved down. In October, core PCE prices were unchanged for a second month, as goods prices declined and prices of non-energy services posted a small increase. The broad-based deceleration in underlying inflation was also apparent in other measures, such as the trimmed-mean PCE price index and a diffusion index of PCE price changes. Despite the rise in agricultural commodity prices, the increase in retail food prices was modest. In contrast, consumer energy prices continued to rise rapidly in October, and spot prices of imported crude oil moved higher, on net, during November and early December. The rise in prices of nonfuel industrial commodities moderated over the intermeeting period as spot prices of metals declined, but the producer price index for domestically manufactured intermediate goods accelerated in October and November. In November and early December, survey measures of households' short- and long-term inflation expectations remained in the ranges that have prevailed since the spring of 2009. Available measures of labor compensation showed that labor cost pressures were still restrained. The 12-month change in average hourly earnings for all employees remained low in November. In the third quarter, the modest rise in hourly compensation in the nonfarm business sector was matched by a similar increase in productivity. The U.S. international trade deficit narrowed considerably in October, shrinking to its lowest level since the beginning of the year, as exports surged and imports edged down. The strength in exports was relatively broad based. Exports of industrial supplies and agricultural goods registered the largest increases, although rising prices accounted for some of those gains. Exports of machinery and automotive products also rose strongly. The decrease in imports was concentrated in petroleum products, reflecting lower volumes, and in computers. In contrast, imports of consumer goods posted a noticeable increase. Recent data releases confirmed that, in the aggregate, the rise in foreign real gross domestic product (GDP) slowed sharply in the third quarter from the very rapid pace earlier in the year. The slowdown was most pronounced in the emerging market economies (EMEs), where economic activity was restrained by the abatement of inventory rebuilding and the associated waning of the rebound in global trade, the unwinding of fiscal stimulus measures, and a continued tightening of monetary policies in several countries. More recent indicators for the EMEs, including purchasing managers indexes (PMIs), pointed to a rebound in economic activity in the fourth quarter. The advanced foreign economies (AFEs) also saw a slower rise in real economic activity in the third quarter than occurred earlier in the year. In the euro area, economic performance continued to diverge across countries. The increase in German economic activity in the third quarter was nearly twice the euro-area average rate, and recent indicators, including PMIs and consumer and business sentiment, showed further solid performance. In contrast, Spanish economic activity stagnated in the third quarter, Greek GDP extended its decline, and more-recent indicators point to continued weakness in peripheral European economies. Headline inflation rates generally picked up in the foreign economies, driven largely by food and energy prices; measures of inflation excluding food and energy prices were relatively steady. Staff Review of the Financial Situation The decision by the FOMC at its November meeting to maintain the 0 to 1/4 percent target range for the federal funds rate was widely anticipated. The decision to expand its holdings of longer-term securities by $600 billion by the end of the second quarter of 2011 was also roughly in line with market expectations, although market participants appeared to expect the purchase program would be increased over time. In the weeks following the November meeting, yields on nominal Treasury securities increased significantly, as investors reportedly revised down their estimates of the ultimate size of the FOMC's new asset-purchase program. Incoming economic data that were viewed, on balance, as favorable to the outlook and news of a tentative agreement between the Administration and some members of the Congress regarding a package of fiscal measures also reportedly contributed to the backup in yields. Market participants pointed to abrupt changes in investor positions, the effects of the approaching year-end on market liquidity, and hedging flows associated with investors' holdings of MBS as factors that may have amplified the rise in yields. Futures quotes suggested that the path for the federal funds rate expected by market participants rose over the intermeeting period. The increase in yields on nominal Treasury coupon securities was accompanied by increases in yields on TIPS. TIPS-based inflation compensation moved up at the 5-year horizon amid rising energy prices, but forward inflation compensation 5 to 10 years ahead was about unchanged. Yields on investment-grade corporate bonds rose about in line with those on comparable-maturity Treasury securities, leaving risk spreads about unchanged; spreads on speculative-grade corporate bonds moved down somewhat. Secondary-market prices for leveraged loans rose slightly over the intermeeting period, while bid-asked spreads in that market continued to drift down. Some signs of modest stress emerged in certain short-term funding markets over the intermeeting period as investors focused increasingly on the evolving situation in Europe. The spread of the three-month London interbank offered rate (or Libor) forward rate agreement over the three-month forward overnight index swap (OIS) rate moved a bit higher, on balance, perhaps pointing to heightened concerns about future funding conditions. In the commercial paper market, spreads increased on paper issued by financial institutions with parents in peripheral European countries, and the amount outstanding of such paper declined. Spreads on asset-backed commercial paper were somewhat volatile over the intermeeting period. Nonetheless, spreads on nonfinancial commercial paper remained at low levels, as did the spreads of dollar Libor over OIS rates at one- and three-month maturities. Broad U.S. equity price indexes increased moderately, on net, over the intermeeting period, in part reflecting incoming economic data that were read by investors as suggesting that the recovery could be gaining traction, at least outside the housing sector. Stock prices for domestic commercial banks were volatile but outperformed broad indexes on balance. Option-implied volatility on the S&P 500 index fell modestly, and the spread between the staff's estimate of the expected real return on equity for S&P 500 firms and the real 10-year Treasury yield--a rough measure of the equity risk premium--narrowed a bit, although it remained elevated relative to longer-run norms. In the December 2010 Senior Credit Officer Opinion Survey on Dealer Financing Terms, dealers reported an easing of credit terms over the preceding three months with respect to securities financing transactions and across a range of counterparties. Dealers also noted that demand for funding of all types of securities increased over the same reference period. Net debt financing by U.S. nonfinancial corporations continued to be robust in November. Gross issuance of corporate bonds was very heavy, particularly for speculative-grade firms. Investor demand for syndicated leveraged loans also appeared to have remained high. Nonfinancial commercial paper outstanding declined noticeably during October and November, in part because some firms reportedly shifted to bond financing. Gross public equity issuance by nonfinancial firms through seasoned and initial public offerings was particularly strong in November. Measures of the credit quality of nonfinancial corporations continued to improve. Conditions in the commercial real estate market remained tight. Commercial mortgage debt was estimated to have declined in the third quarter, and the delinquency rates for securitized commercial mortgages and those for existing properties at commercial banks increased further. However, some modest signs of improvement continued to surface. Prices of commercial real estate changed little, on balance, over September and October, holding in the relatively narrow range that had prevailed since the spring when the steep decline in these prices ended. Issuance of commercial mortgage-backed securities increased in November but was still far below pre-crisis levels. Residential mortgage rates rose considerably over the intermeeting period, though not by as much as rates on longer-term Treasury securities. The spread between mortgage rates and MBS yields dropped back, reversing the widening of the spread that occurred over the preceding several months. Refinancing activity declined in response to the higher mortgage rates. Outstanding residential mortgage debt was estimated to have contracted in the third quarter at about the average rate of decline seen over the preceding year. Delinquency rates on prime and subprime mortgages ticked down but remained extremely elevated. In contrast, the consumer credit market exhibited continued signs of stabilization. Although consumer credit contracted in the third quarter, the decline was the smallest since late 2008, and consumer credit edged higher in October. The pace of issuance of consumer asset-backed securities in November was slightly above the average for the year to date, and the delinquency rate on consumer loans at banks declined further in the third quarter. Commercial bank credit was about flat, on average, during October and November. Banks continued to increase their holdings of securities, while core loans--the sum of commercial and industrial (C&I), real estate, and consumer loans--decreased moderately. The declines were attributable to a drop in consumer loans as well as to continued runoffs in commercial real estate and home equity loans. In contrast, C&I loans edged up, ending a nearly two-year string of monthly declines. In addition, the Survey of Terms of Business Lending conducted in the first week of November showed that interest rates on C&I loans were generally little changed while spreads remained extremely wide. According to the latest Call Report data, bank profitability was little changed in the third quarter, remaining positive but well below pre-crisis levels. As in the second quarter, banks' net incomes were supported by declines in loan loss provisioning, while revenues declined. Banks continued to boost regulatory capital ratios, likely, at least in part, in anticipation of the need to eventually meet stricter Basel III standards. M2 expanded at a moderate rate in November. Interest rates available on all M2 assets remained very low, and households continued to shift their holdings of M2 assets toward liquid deposits, which continued to rise rapidly, and away from small time deposits and retail money market mutual funds. Currency increased strongly, with indicators suggesting robust demand from abroad. The foreign exchange value of the dollar, which depreciated immediately following the FOMC's November announcement of further asset purchases, subsequently appreciated amid intensifying concerns about stresses in the euro area and some apparent reassessment by investors of the monetary policy outlook in the United States. On net, the dollar ended the intermeeting period up against most currencies, with particularly large gains against the euro. The announcement of the European Union (EU)-International Monetary Fund (IMF) financial aid package for Ireland on November 28 did little to reverse the depreciation of the euro, as investors reportedly became increasingly concerned about other euro-area economies and the adequacy of resources available to support them should they come under stress. Spreads of sovereign yields in some peripheral euro-area countries over those on German bunds rose to new highs, although they fell back near the end of the intermeeting period amid reports that the European Central Bank (ECB) had increased its purchases of Irish and Portuguese sovereign debt. Banks in the euro-area periphery continued to rely heavily on funding from the ECB, and some signs of increased dollar funding pressures emerged. Implied short-term interest rates for the coming year shifted down in the euro area, as market participants apparently scaled back the pace at which they expected the ECB to normalize policy, but rose in some other AFEs. Ten-year sovereign yields increased significantly throughout the AFEs, although by less than yields in the United States. Headline stock price indexes in the AFEs generally ended the period higher, whereas bank stocks in Europe declined. The People's Bank of China raised the required reserve ratio for banks a cumulative 150 basis points over the intermeeting period, and other central banks in emerging Asia increased policy rates. China's Shanghai Composite Index fell in the wake of Chinese policy actions, while other emerging market stock indexes were mixed over the period. In Latin America, Brazil's central bank also raised reserve requirements late in the period. The dollar appreciated slightly, on average, against the emerging market currencies, although it edged down against the Chinese renminbi. Staff Economic Outlook With the recent data on production and spending stronger, on balance, than the staff anticipated at the time of the November FOMC meeting, the staff revised up its projected increase in real GDP in the near term. However, the staff's outlook for real economic activity over the medium term was little changed, on net, relative to the projection prepared for the November meeting. The staff forecast incorporated the assumption that new fiscal actions, some of which had not been anticipated in its previous forecast, were likely to boost the level of real GDP in 2011 and 2012. But, compared with the November forecast, a number of other conditioning assumptions were less favorable: House prices and housing activity were likely to be lower, while interest rates, oil prices, and the foreign exchange value of the dollar were projected to be higher, on average, than previously assumed. As a result, although the staff projection showed a higher level of real GDP, the average pace of growth over 2011 and 2012 was little changed from the November forecast, and the unemployment rate was still projected to decline slowly. The underlying rate of consumer price inflation in recent months was lower than the staff expected at the time of the November meeting, and the staff forecast anticipated that core PCE prices would rise a bit more slowly in 2011 and 2012 than previously projected. As in earlier forecasts, the persistent wide margin of economic slack in the projection was expected to sustain downward pressure on inflation, but the ongoing stability in inflation expectations was anticipated to stem further disinflation. The staff anticipated that relatively rapid increases in energy prices would raise total consumer price inflation above the core rate in the near term, but that this upward pressure would dissipate by 2012. Participants' Views on Current Conditions and the Economic Outlook In their discussion of the economic situation and outlook, meeting participants saw the information received during the intermeeting period as pointing to some improvement in the near-term outlook, and they expected that economic growth, which had been moderate, would pick up somewhat going forward. Indicators of production and household spending had strengthened, and the tone of the labor market was a little better on balance. The new fiscal package was generally expected to support the pace of recovery next year. However, a number of factors were seen as likely to continue restraining growth, including the depressed housing market, employers' continued reluctance to add to payrolls, and ongoing efforts by some households and businesses to delever. Moreover, the recovery remained subject to some downside risks, such as the possibility of a more extended period of weak activity and lower prices in the housing sector and potential financial and economic spillovers if the banking and sovereign debt problems in Europe were to worsen. In light of recent readings on consumer inflation, participants noted that underlying inflation had continued trending downward, but several saw the risk of deflation as having receded somewhat. In the household sector, incoming data on retail sales were somewhat stronger than expected, and there were some reasonably upbeat reports from business contacts regarding holiday spending. Consumer confidence appeared to be improving. Financial obligations and debt service costs had been declining as a share of household income, and that process was seen as providing greater latitude for a pickup in discretionary purchases. Nonetheless, there were indications that retail spending by middle- and lower-income households had risen less than spending by high-income households, suggestive of ongoing financial pressures on those of more modest means. Furthermore, the housing sector, including residential construction and home sales, continued to be depressed. Some participants noted that the elevated supply of available homes and the overhang of foreclosed homes were contributing to a further decline in house prices. The lower house prices, in turn, were seen as reducing household wealth and thus restraining growth in consumer spending. A number of participants noted that their business contacts had become more optimistic about the outlook for sales and production. Nonetheless, many contacts remained cautious about hiring and investment, with some reportedly concerned about the potential effects of government policies. The manufacturing, agriculture, and energy sectors showed particular signs of strength, and the high-tech sector appeared to be improving. However, nonresidential construction remained very weak, apart from drilling and mining. It was noted that credit conditions had eased further, although nonfinancial corporations continued to hold very high levels of cash. Conditions in the labor market appeared to be improving on balance. That improvement was reflected in a range of recent indicators, including a declining number of new jobless claims, an increase in job openings, and an uptick in the average workweek. Nonetheless, participants noted that the pace of hiring was still sluggish; indeed, the unemployment rate had edged higher in November, and the employment-population ratio remained very low. Interest rates at intermediate and longer maturities rose substantially over the intermeeting period, while credit spreads were roughly unchanged and equity prices rose moderately. Participants pointed to a number of factors that appeared to have contributed to the significant backup in yields, including an apparent downward reassessment by investors of the likely ultimate size of the Federal Reserve's asset-purchase program, economic data that were seen as suggesting an improved economic outlook, and the announcement of a package of fiscal measures that was expected to bolster economic growth and increase the deficit over coming quarters. It was noted that the backup in rates may have been amplified by year-end positioning, as well as by some reported mortgage-related hedging flows. A number of participants indicated that, because the backup in rates appeared to importantly reflect changes in investors' expectations about the size of Federal Reserve asset purchases, the backup was consistent with purchases helping to keep longer-term yields lower than would otherwise be the case. Several meeting participants mentioned the communications challenges faced in conducting effective policy, including the need to clearly convey the Committee's views while appropriately airing individual perspectives.   Measures of underlying inflation continued to trend downward over the intermeeting period, with the slowdown in price increases evident across categories of goods and services and across different inflation measures. Although the prices of some commodities and imported goods had risen appreciably, several participants noted that businesses seemed to have little ability to pass these increases on to their customers, given the significant slack in the economy. Also, the high level of unemployment was limiting gains in wages and thereby contributing to the low level of inflation. TIPS-based measures of inflation compensation had risen modestly over the intermeeting period, while surveys of households and professional forecasters continued to suggest that longer-term inflation expectations remained stable. Regarding their overall outlook for economic activity, participants generally agreed that, even with the positive news received over the intermeeting period, the most likely outcome was a gradual pickup in growth with slow progress toward maximum employment. However, they held a range of views about the risks to that outlook. A few mentioned the possibility that growth could pick up more rapidly than expected, particularly in light of the very accommodative stance of monetary policy currently in place. It was noted that such an acceleration would likely be accompanied by significantly more rapid growth in bank lending and in the monetary aggregates, suggesting that such indicators might prove to be useful sources of information. Others pointed to downside risks to growth. One common concern was that the housing sector could weaken further in light of the considerable supply of houses either on the market or likely to come to market. Another concern was the ongoing deterioration in the fiscal position of U.S. states and localities, which could lead to sharp cuts in spending and increases in taxes. In addition, participants expressed concerns about a possible worsening of the banking and financial strains in Europe, which could spill over to U.S. financial markets and institutions, and so to the broader U.S. economy. They observed that market stresses in Europe intensified during the intermeeting period, requiring an assistance package for Ireland from the EU and the IMF, and that after that package was announced, market attention appeared to shift to other European countries. Participants noted, however, that the European authorities were taking steps to stabilize conditions in the euro area. Regarding the outlook for inflation, participants generally anticipated that inflation would remain for some time below levels judged to be most consistent, over the longer run, with maximum employment and price stability. In particular, most participants expected that underlying measures of inflation would bottom out around current levels and then move gradually higher as the recovery progresses. A few participants pointed to the risk that the ongoing expansion of the Federal Reserve's balance sheet and the sustained low level of short-term interest rates could trigger undesirable increases in inflation expectations and so in actual inflation. To minimize such risks, it was noted that the Committee should continue its planning for the eventual exit from the current exceptionally accommodative stance of policy. Other participants noted that, with substantial resource slack persisting, underlying inflation might fall further below the levels that the Committee sees as consistent with its mandate. Nonetheless, several participants saw the risk of deflation as having receded somewhat over recent months. Committee Policy Action  Members noted that, while incoming information over the intermeeting period had increased their confidence in the economic recovery, progress toward the Committee's dual objectives of maximum employment and price stability was disappointingly slow. In addition, members generally expected that progress was likely to remain modest, with unemployment and inflation deviating from the Committee's objectives for some time. Accordingly, in their discussion of monetary policy for the period immediately ahead, nearly all Committee members agreed to continue expanding the Federal Reserve's holdings of longer-term securities as announced in November in order to promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with the Committee's mandate. The Committee decided to maintain its existing policy of reinvesting principal payments from its securities holdings into longer-term Treasury securities. In addition, the Committee agreed to continue buying longer-term Treasury securities with the intention of purchasing $600 billion of such securities by the end of the second quarter of 2011, a pace of about $75 billion per month. While the economic outlook was seen as improving, members generally felt that the change in the outlook was not sufficient to warrant any adjustments to the asset-purchase program, and some noted that more time was needed to accumulate information on the economy before considering any adjustment. Members emphasized that the pace and overall size of the purchase program would be contingent on economic and financial developments; however, some indicated that they had a fairly high threshold for making changes to the program. The Committee also decided to maintain the target range for the federal funds rate at 0 to 1/4 percent and to reiterate its expectation that economic conditions are likely to warrant exceptionally low levels for the federal funds rate for an extended period. One member dissented from the Committee's policy decision, judging that, in light of the improving economy, a continued high level of monetary accommodation would increase the risks of future economic and financial imbalances. Members agreed that the Committee should continue to regularly review the pace of its securities purchases and the overall size of the program in light of incoming information--including information on the economic outlook, the efficacy of the program, and any unintended consequences that might arise--and make adjustments as needed to best foster maximum employment and price stability. With respect to the statement to be released following the meeting, members agreed that only small changes were necessary to reflect the modest improvement in the near-term economic outlook. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to execute purchases of longer-term Treasury securities in order to increase the total face value of domestic securities held in the System Open Market Account to approximately $2.6 trillion by the end of June 2011. The Committee also directs the Desk to reinvest principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability." The vote encompassed approval of the statement below to be released at 2:15 p.m.: "Information received since the Federal Open Market Committee met in November confirms that the economic recovery is continuing, though at a rate that has been insufficient to bring down unemployment. Household spending is increasing at a moderate pace, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. The housing sector continues to be depressed. Longer-term inflation expectations have remained stable, but measures of underlying inflation have continued to trend downward. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been disappointingly slow. To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to continue expanding its holdings of securities as announced in November. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate." Voting for this action: Ben Bernanke, William C. Dudley, James Bullard, Elizabeth Duke, Sandra Pianalto, Sarah Bloom Raskin, Eric Rosengren, Daniel K. Tarullo, Kevin Warsh, and Janet L. Yellen. Voting against this action: Thomas M. Hoenig. Mr. Hoenig dissented because he judged that economic conditions were improving, and that the current highly accommodative stance of monetary policy was inconsistent with the Committee's long-run mandate. Mr. Hoenig noted that the economic recovery was shifting from transitory to more sustainable sources of growth and was picking up momentum. In his assessment, maintaining highly accommodative monetary policy in the current economic environment would increase the risk of future imbalances and, over time, cause an increase in longer-term inflation expectations. Mr. Hoenig also was concerned that the eventual orderly reduction of policy accommodation would become more difficult the longer the first step in that process was delayed. In Mr. Hoenig's view, the Committee should begin preparing markets for a reduction in policy accommodation. Accordingly, he thought the press statement should indicate that sufficient monetary stimulus was in place to support the recovery. It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, January 25-26, 2011. The meeting adjourned at 12:55 p.m. on December 14, 2010. Notation Vote By notation vote completed on November 22, 2010, the Committee unanimously approved the minutes of the FOMC meeting held on November 2-3, 2010.   _____________________________ William B. English Secretary Return to top

2010-12-14

Statement

Information received since the Federal Open Market Committee met in November confirms that the economic recovery is continuing, though at a rate that has been insufficient to bring down unemployment. Household spending is increasing at a moderate pace, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. The housing sector continues to be depressed. Longer-term inflation expectations have remained stable, but measures of underlying inflation have continued to trend downward. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been disappointingly slow. To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to continue expanding its holdings of securities as announced in November. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate. Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Sandra Pianalto; Sarah Bloom Raskin; Eric S. Rosengren; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen. Voting against the policy was Thomas M. Hoenig. In light of the improving economy, Mr. Hoenig was concerned that a continued high level of monetary accommodation would increase the risks of future economic and financial imbalances and, over time, would cause an increase in long-term inflation expectations that could destabilize the economy.

2010-11-23

Minute

A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors in Washington, D.C., on Tuesday, November 2, 2010, at 1:00 p.m. and continued on Wednesday, November 3, 2010, at 9:00 a.m. PRESENT: Ben Bernanke, Chairman William C. Dudley, Vice Chairman James Bullard Elizabeth Duke Thomas M. Hoenig Sandra Pianalto Sarah Bloom Raskin Eric Rosengren Daniel K. Tarullo Kevin Warsh Janet L. Yellen Christine Cumming, Charles L. Evans, Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, Alternate Members of the Federal Open Market Committee Jeffrey M. Lacker and Dennis P. Lockhart, Presidents of the Federal Reserve Banks of Richmond and Atlanta, respectively John F. Moore, First Vice President, Federal Reserve Bank of San Francisco William B. English, Secretary and Economist Deborah J. Danker, Deputy Secretary Matthew M. Luecke, Assistant Secretary David W. Skidmore, Assistant Secretary Michelle A. Smith, Assistant Secretary Scott G. Alvarez, General Counsel Thomas C. Baxter, Deputy General Counsel Nathan Sheets, Economist David J. Stockton, Economist James A. Clouse, Thomas A. Connors, Jeff Fuhrer, Steven B. Kamin, Simon Potter, Lawrence Slifman, Christopher J. Waller, and David W. Wilcox, Associate Economists Brian Sack, Manager, System Open Market Account Patrick M. Parkinson, Director, Division of Bank Supervision and Regulation, Board of Governors Nellie Liang, Director, Office of Financial Stability Policy and Research, Board of Governors William Nelson, Deputy Director, Division of Monetary Affairs, Board of Governors Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors Charles S. Struckmeyer, Deputy Staff Director, Office of the Staff Director, Board of Governors Seth B. Carpenter and Andrew T. Levin, Senior Associate Directors, Division of Monetary Affairs, Board of Governors; Michael Leahy, Senior Associate Director, Division of International Finance, Board of Governors; David Reifschneider, Senior Associate Director, Division of Research and Statistics, Board of Governors Stephen A. Meyer, Senior Adviser, Division of Monetary Affairs, Board of Governors Daniel M. Covitz and David E. Lebow, Deputy Associate Directors, Division of Research and Statistics, Board of Governors; Gretchen C. Weinbach, Deputy Associate Director, Division of Monetary Affairs, Board of Governors Brian J. Gross, Special Assistant to the Board, Office of Board Members, Board of Governors Mark A. Carlson, Economist, Division of Monetary Affairs, Board of Governors Randall A. Williams, Records Management Analyst, Division of Monetary Affairs, Board of Governors Sarah G. Green, First Vice President, Federal Reserve Bank of Richmond Loretta J. Mester, Harvey Rosenblum, Daniel G. Sullivan, and John C. Williams, Executive Vice Presidents, Federal Reserve Banks of Philadelphia, Dallas, Chicago, and San Francisco, respectively David Altig, Richard P. Dzina, Mark E. Schweitzer, and Kei-Mu Yi, Senior Vice Presidents, Federal Reserve Banks of Atlanta, New York, Cleveland, and Minneapolis, respectively Todd E. Clark, Vice President, Federal Reserve Bank of Kansas City Robert L. Hetzel, Senior Economist, Federal Reserve Bank of Richmond The meeting opened with a short discussion regarding communicating with the public about monetary policy deliberations and decisions. Meeting participants supported a review of the Committee's communication guidelines with the aim of ensuring that the public is well informed about monetary policy issues while preserving the necessary confidentiality of policy discussions until their scheduled release. Governor Yellen agreed to chair a subcommittee to conduct such a review. Developments in Financial Markets and the Federal Reserve's Balance Sheet The Manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets since the Committee met on September 21, 2010. He also reported on System open market operations, including the continuing reinvestment into longer-term Treasury securities of principal payments received on the SOMA's holdings of agency debt and agency-guaranteed mortgage-backed securities (MBS). The Open Market Desk at the Federal Reserve Bank of New York purchased a total of about $65 billion of Treasury securities since the Committee decided, on August 10, to begin reinvesting such principal payments. Purchases were concentrated in nominal Treasury securities with maturities of 2 to 10 years, though some shorter-term and some longer-term securities were purchased along with some Treasury inflation-protected securities (TIPS). Over the intermeeting period, the Desk also conducted a number of small-value tri-party reverse repurchase operations with the primary dealers and with money market mutual funds that have been accepted as counterparties for such operations; these transactions, which the Desk conducted to ensure continuing operational and systems readiness, used Treasury securities, agency debt, and agency-guaranteed MBS as collateral. In addition, the Federal Reserve conducted another small-value auction of term deposits to ensure the continued operational readiness of the term deposit facility and to increase the familiarity of eligible depository institutions with the auction procedures. There were no open market operations in foreign currencies for the System's account over the intermeeting period. By unanimous vote, the Committee ratified the Desk's transactions over the intermeeting period. The Manager described the tentative plans the Desk had prepared for implementing a possible Committee decision to expand further the System's holdings of longer-term Treasury securities. Purchases would continue to be concentrated in nominal Treasury securities with remaining maturities between 2 and 10 years, with some purchases of shorter- and longer-term securities and of TIPS; with this maturity distribution, newly purchased securities would be expected to have an average duration of 5 to 6 years, essentially the same as the average duration of the System's existing holdings of Treasury securities. The Desk planned to publish additional information about its transactions to increase the transparency of, and encourage wider participation in, future purchase operations. The Desk judged that if it continued reinvesting principal payments from the Federal Reserve System's holdings of agency debt and agency MBS in longer-term Treasury securities, then it could purchase additional longer-term Treasury securities at a pace of about $75 billion per month while avoiding disruptions in market functioning. The Manager indicated that implementing a sizable increase in the System's holdings of Treasury securities most effectively likely would entail a temporary relaxation of the 35 percent per-issue limit on SOMA holdings under which the Desk had been operating; whether, and to what extent, the System's holdings of some issues would exceed 35 percent would depend on the specific securities that dealers choose to offer at future auctions. Finally, the Manager summarized the implications for the Federal Reserve's balance sheet and income statement of alternative decisions that the Committee might make about the size and maturity distribution of the SOMA's securities holdings. Participants discussed the Desk's tentative operational plans; they also discussed the potential effects of an expansion of the System's holdings of longer-term securities on financial markets and institutions and on the economy, and the channels through which those effects could occur. Staff Review of the Economic Situation The information reviewed at the November 2-3 meeting indicated that the economic recovery proceeded at a modest rate in recent months, with only a gradual improvement in labor market conditions, and was accompanied by a continued low rate of inflation. Consumer spending, business investment in equipment and software, and exports posted further gains in the third quarter, and nonfarm inventory investment stepped up. But construction activity in both the residential and nonresidential sectors remained depressed, and a significant portion of the rise in domestic demand was again met by imports. U.S. industrial production slowed noticeably in August and September, hiring at private businesses remained modest, and the unemployment rate stayed elevated. Headline consumer price inflation was subdued in recent months, despite a rise in energy prices, as core consumer price inflation trended lower. Private businesses continued to increase their demand for labor only modestly. In September, private nonfarm payroll employment remained on a gradual uptrend, and the average workweek of all private-sector employees was unchanged for a third month. In addition, the number of individuals working part time for economic reasons moved back up for a second month, and the available measures of job openings and hiring were still low. The unemployment rate remained at 9.6 percent in September, leaving the average rate for the third quarter only slightly below its average over the first half of the year. Long-duration unemployment continued to recede somewhat but was still very high. Indicators of layoffs remained elevated, although initial claims for unemployment insurance drifted down a little during October. The labor force participation rate in September was unchanged at a level lower than earlier in the year. After rising rapidly from mid-2009 to mid-2010, industrial production decelerated in August and edged down in September. In the manufacturing sector, output gains across a wide range of industries were smaller in recent months, and capacity utilization leveled off at a rate still well below its longer-run average. Production of motor vehicles picked up during the third quarter as automakers replenished dealers' stocks, but motor vehicle assemblies were scheduled to drop back in coming months. More broadly, October surveys of new orders received by manufacturers suggested that demand for factory goods had continued to increase. Real personal consumption expenditures (PCE) rose at a moderate rate in the third quarter. Rising equity prices likely resulted in some further improvement in net worth over the same period. However, real disposable personal income, which rose strongly in the first half of the year, increased only slightly in the third quarter. As a result, the personal saving rate dropped back somewhat in the third quarter, although it remained near the high levels that have prevailed since late 2008. Bank lending standards were still relatively tight, and household borrowing remained low. Surveys taken in September and October indicated that consumers were slightly more pessimistic about the economic outlook than earlier in the year. Activity in the housing market remained exceptionally weak. Although sales of new and existing homes turned up in August and September, the still-low level of demand suggested that the payback for the earlier boost to sales from the homebuyer tax credit had not yet faded. Moreover, despite further declines in mortgage interest rates in recent months, other factors continued to restrain housing demand, including consumer pessimism about the outlook for jobs and income, the depressed rate of household formation, and tight underwriting standards for mortgages. In addition, the moratoriums recently announced by some banks on the sale of properties they had seized in foreclosures were likely to damp home sales further in the near term. Starts of new single-family houses rose somewhat in August and September, but the pace of construction was still noticeably below the already-depressed level of the preceding year. New homebuilding appeared to be weighed down by the backlog of unsold existing homes and tight lending conditions for acquisition, development, and construction loans. After a very strong increase in the first half of the year, business investment in equipment and software posted a smaller, but still solid, gain in the third quarter. Nominal shipments of nondefense capital goods from domestic manufacturers remained on a moderate uptrend through September. But rising demand for equipment and software during the third quarter was also satisfied in part by a further rise in imports of capital goods. Near-term indicators of business spending on equipment and software were generally positive. New orders for nondefense capital goods, excluding aircraft, continued to outpace shipments through September. Credit conditions improved further in the third quarter, particularly for larger firms with access to the capital markets. Financing flows to smaller firms, which are more dependent on banks, were more subdued. Real nonfarm inventory investment was estimated to have picked up during the third quarter. Rebuilding of dealers' stocks of motor vehicles accounted for part of the step-up, but some of it likely reflected another large increase in imports. In August, inventory-to-sales ratios for most industries remained well below their previous peaks. Surveys of purchasing managers in September and October indicated that most did not perceive their customers' inventories to be too high. Business investment in nonresidential structures was about flat in the third quarter as another strong increase in spending for drilling and mining structures offset further declines in outlays on commercial and industrial buildings. Consumer price inflation remained low in recent months. The total PCE price index increased slightly in September as consumer energy prices moved up noticeably for a third month. The core PCE price index was unchanged in September, and the 12-month increase in this index continued to trend down. At earlier stages of processing, the rise in producer prices for intermediate materials remained moderate in September, but prices of globally traded industrial and agricultural commodities accelerated considerably in October, reflecting in part the lower foreign exchange value of the dollar as well as concerns about supply for certain commodities. In September and October, survey measures of households' short- and long-term expectations for inflation remained in the ranges that have prevailed since the spring of 2009. Labor compensation rose at a moderate rate in the third quarter. Private-sector wage increases, as measured by both average hourly earnings of all employees and the employment cost index (ECI), remained subdued. However, according to the ECI, employer benefit costs accelerated this year after posting a very small increase in 2009. The U.S. international trade deficit widened in August, after narrowing in July, as a modest increase in nominal exports was more than offset by a strong increase in imports. Following widespread declines in July, most major categories of imports rebounded in August, with imports of consumer goods and capital goods exhibiting particular strength. Imports of petroleum products also increased substantially, reflecting both higher volumes and higher prices. The increase in exports was concentrated in agricultural goods, partly boosted by rising prices, and in services; most other major categories either declined or were flat. Recent indicators of foreign economic activity suggested that growth abroad had slowed appreciably after midyear. Following an unsustainably high rate of expansion in the second quarter, growth of real gross domestic product (GDP) in the emerging market economies appeared to have slowed markedly, notwithstanding an apparent acceleration in economic activity in China. Real GDP growth apparently moderated in the advanced foreign economies as well. In the euro area, industrial production rose sharply in August, but purchasing managers indexes moved down in recent months. The German economy continued to perform strongly, while recent data showed weakness in the peripheral euro-area countries. A reacceleration of food and energy prices helped push up inflation abroad, albeit generally to still-moderate levels, in the third quarter. Staff Review of the Financial Situation The decision by the Federal Open Market Committee (FOMC) at its September meeting to maintain the 0 to 1/4 percent target range for the federal funds rate was widely anticipated. However, yields declined as market participants reportedly interpreted the language of the accompanying statement to imply higher odds of additional asset purchases and a longer period of exceptionally low short-term interest rates. Investors took particular note of the statement's indication that inflation was below the levels consistent with the FOMC's dual mandate for maximum employment and price stability. In the weeks following the FOMC meeting, Federal Reserve communications, along with economic data releases that continued to point to a tepid economic outlook, appeared to reinforce market expectations that additional policy accommodation would be forthcoming in the near term. Yields on nominal Treasury coupon securities and those on TIPS declined, on net, over the intermeeting period, largely in response to Federal Reserve communications and somewhat weaker-than-expected economic data releases. Five-year inflation compensation increased over the intermeeting period, and forward inflation compensation 5 to 10 years ahead also rose. Anecdotal reports pointed to the increased likelihood of additional asset purchases by the Federal Reserve and to FOMC communications noting that the Committee viewed underlying inflation as somewhat below the levels judged to be most consistent with the Committee's dual mandate as factors contributing to lower yields and to the increase in inflation compensation over the period. Yields on investment- and speculative-grade corporate bonds declined somewhat more than those on comparable-maturity Treasury securities, leaving risk spreads slightly lower. In the secondary market for syndicated leveraged loans, prices of loans continued to move up and bid-asked spreads narrowed a bit further. Conditions in short-term funding markets were generally stable over the intermeeting period. In dollar funding markets, spreads of term London interbank offered rates (or Libor) over those on overnight index swaps edged up but remained at levels similar to those observed prior to the emergence of euro-area concerns earlier this year. Spreads on unsecured financial commercial paper and on asset-backed commercial paper remained low. Rates on repurchase agreements (repos) involving various types of collateral were little changed on net. Bid-asked spreads in most repo transactions generally declined while changes in haircuts on different types of repo collateral were mixed. Broad U.S. stock price indexes rose, on balance, over the intermeeting period, reflecting investor expectations of further monetary policy accommodation and better-than-expected third-quarter earnings news; option-implied volatility on the S&P 500 index was little changed. The spread between the staff's estimate of the expected real return on equities over the next 10 years and an estimate of the expected real return on a 10-year Treasury note--a rough measure of the equity risk premium--narrowed a bit but remained at an elevated level. Bank stocks generally underperformed the broader market amid concerns about the handling of mortgage foreclosure documents and possible lack of compliance with securitization agreements. Net debt financing by U.S. nonfinancial corporations was very strong in September, with sizable gross corporate bond issuance across the credit spectrum and a substantial increase in commercial paper outstanding, but data for October pointed to a moderation in these flows. Issuance of syndicated leveraged loans in the third quarter remained near the average pace recorded in the first half of the year. Measures of the credit quality of nonfinancial corporations remained solid. The pace of gross public equity issuance from seasoned and initial public offerings by nonfinancial firms remained moderate in September and appeared to slow in October. Commercial real estate markets remained strained. Commercial mortgage debt in the third quarter was estimated to have declined at a rate similar to the drop in the second quarter, and the delinquency rate for securitized commercial mortgages continued to climb in September. However, some signals offered modest encouragement. In particular, vacancy rates for commercial buildings stabilized in the third quarter, and the pipeline of new commercial mortgage-backed securities picked up a bit from very low levels. Residential mortgage refinancing activity moved up in late September and early October, from an already high level, as the average interest rate on fixed-rate mortgages fell further over the intermeeting period. In contrast, the level of applications for mortgages to purchase homes remained anemic. Total consumer credit contracted in August at a pace roughly in line with the declines posted earlier in the year. Issuance of consumer asset-backed securities was solid in September. Consumer credit quality generally continued to improve, though delinquency rates remained elevated. Bank credit edged up in September and October, as brisk growth in banks' holdings of securities more than offset a further decline in total loans. Commercial and industrial (C&I) loans turned down in September after having increased slightly over the two previous months. A moderate net fraction of banks reported, in their responses to the October Senior Loan Officer Opinion Survey on Bank Lending Practices, that they had eased standards on C&I loans and narrowed spreads of C&I loan rates over their cost of funds; demand for such loans reportedly declined, on net, over the preceding three months. Commercial real estate loans, home equity loans, and consumer loans contracted. However, closed-end residential mortgage loans on banks' books increased modestly for the second month in a row. Over September and October, M2 expanded at an average annual rate that was noticeably above its pace earlier in the year. The growth rate of liquid deposits moved up, while small time deposits and retail money market mutual funds continued to contract. The compositional shift likely reflected the relatively attractive yields on liquid deposits. Currency growth strengthened, with indicators suggesting strong demand from abroad. The dollar declined about 3 percent against a broad array of other currencies during the intermeeting period, depreciating even more against the euro and the yen. In addition, Chinese authorities allowed the renminbi to appreciate slightly against the dollar. Market commentary highlighted the possibility that major central banks would further ease monetary policy, and the Bank of Japan expanded its asset purchase program and reduced its policy target rate to a range of 0 to 10 basis points. Benchmark 10-year sovereign yields generally declined in the major advanced foreign economies, but the overnight rate in the euro area increased as the European Central Bank continued to allow the amount of liquidity provided to the banking system to decline. Spreads relative to German bunds on the 10-year sovereign bonds of most peripheral euro-area countries either declined or were little changed over the period, but Irish sovereign spreads moved higher on concerns over the fiscal burdens associated with losses in the Irish banking sector. Major equity indexes in the euro area and in the United Kingdom increased moderately, whereas the Nikkei index declined. Several emerging market central banks tightened monetary policy, including the People's Bank of China. Against the backdrop of interest rate declines in many of the advanced economies, as well as heavy capital flows toward emerging market countries, many emerging market currencies strengthened, reportedly prompting further official intervention in foreign exchange markets. Staff Economic Outlook Because the recent data on production and spending were broadly in line with the staff's expectations, the forecast for economic activity that was prepared for the November FOMC meeting showed little change to the staff's near-term outlook relative to the forecast prepared for the September FOMC meeting. However, the staff revised up its forecast for economic activity in 2011 and 2012. In light of asset market developments over the intermeeting period, which in large part appeared to reflect heightened expectations among investors that the Federal Reserve would undertake additional purchases of longer-term securities, the November forecast was conditioned on lower long-term interest rates, higher stock prices, and a lower foreign exchange value of the dollar than was the staff's previous forecast. These factors were expected to provide additional support to the recovery in economic activity. Accordingly, the unemployment rate was anticipated to recede somewhat more than in the previous forecast, although the margin of slack at the end of 2011 was still expected to be substantial. The staff's forecast continued to show subdued rates of headline and core inflation during 2011 and 2012. However, the downward pressure on inflation from slack in resource utilization was expected to be slightly less than previously projected, and prices of imported goods were anticipated to rise somewhat faster. As in previous forecasts, further disinflation was expected to be checked by the ongoing stability of inflation expectations. Participants' Views on Current Conditions and the Economic Outlook In conjunction with this FOMC meeting, all meeting participants--the six members of the Board of Governors and the heads of the 12 Federal Reserve Banks--provided projections of output growth, the unemployment rate, and inflation for each year from 2010 through 2013 and over the longer run. Longer-run projections represent each participant's assessment of the rate to which each variable would be expected to converge, over time, under appropriate monetary policy and in the absence of further shocks. Participants' forecasts are described in the Summary of Economic Projections, which is attached as an addendum to these minutes. In their discussion of the economic situation and outlook, meeting participants generally agreed that the incoming data indicated that output and employment were continuing to increase, but only slowly. Progress toward the Committee's dual objectives of maximum employment and price stability was described as disappointingly slow. Participants variously noted a number of factors that were restraining growth, including low levels of household and business confidence, concerns about the durability of the economic recovery, continuing uncertainty about the future tax and regulatory environment, still-weak financial conditions of some households and small businesses, the depressed housing market, and waning fiscal stimulus. Although participants considered it quite unlikely that the economy would slide back into recession, some noted that continued slow growth and high levels of resource slack could leave the economic expansion vulnerable to negative shocks. In the absence of such shocks, and assuming appropriate monetary policy, participants' economic projections generally showed growth picking up to a moderate pace and the unemployment rate declining somewhat next year. Participants generally expected growth to strengthen further and unemployment to decline somewhat more rapidly in 2012 and 2013. Indicators of spending by households and businesses remained mixed. Consumer spending was expanding gradually. Participants noted that households were continuing their efforts to repair their balance sheets, a process that was restraining growth in consumer spending. Sluggish employment growth and elevated uncertainty about job prospects also continued to weigh on household spending. With respect to business spending, contacts generally reported that they were investing to reduce costs but were refraining from adding workers or expanding capacity in the United States. Energy producers were an exception. Participants observed that firms had generated rising profits, but that business contacts indicated those gains largely reflected cost-cutting rather than top-line growth in revenues. A number of businesses continued to report that they were holding back on hiring and capital spending because of uncertainty about future taxes, health-care costs, and regulations. But concerns about actual and anticipated demand also were important factors limiting investment and hiring. Firms continued to report strong foreign demand for their products, particularly from Asia. Participants noted that the housing sector, including residential construction and home sales, remained depressed. Foreclosures were adding to the elevated supply of available homes and putting downward pressure on home prices and housing construction. Some participants saw disputes over mortgage and foreclosure documents as likely to delay the eventual recovery in housing markets. Commercial real estate markets also were weak, and the availability of credit for commercial real estate transactions remained limited, but low interest rates were helping stabilize prices. Participants agreed that progress in reducing unemployment was disappointing; indeed, several noted that the recent rate of output growth, if continued, would more likely be associated with an increase than a decrease in the unemployment rate. Participants again discussed the extent to which employment was being held down, and the unemployment rate boosted, by structural factors such as mismatches between the skills of the workers who had lost their jobs and the skills needed in the sectors of the economy with vacancies, the inability of the unemployed to relocate because their homes were worth less than the principal they owed on their mortgages, and the effects of extended unemployment benefits on the duration of unemployed workers' search for a new job. Participants agreed that such factors were contributing to continued high unemployment but differed in their assessments of the magnitude of such effects. Many participants saw evidence that the current unemployment rate was well above levels that could be explained by structural factors alone, noting, for example, reports from business contacts indicating that weak growth in demand for their firms' products remained a key reason why they were reluctant to add employees, and job vacancy rates that were low relative to historical experience. A number of participants noted that continued high unemployment, particularly with large numbers of workers suffering very long spells of unemployment, would lead to an erosion of workers' skills that would have adverse consequences for those workers and for the economy's potential level of output in the longer term. Participants saw financial conditions as having become more supportive of growth over the course of the intermeeting period; most, though not all, of the change appeared to reflect investors' increasing anticipation of a further easing of monetary policy. Most longer-term nominal interest rates declined, real interest rates fell even more, credit spreads tightened, and equity prices rose, in part reflecting better-than-expected corporate earnings reports. Inflation compensation rose noticeably, returning to a level more typical of recent years. Participants noted that credit remained readily available--in debt markets and from banks--for larger corporations, and there were some signs that credit conditions had begun to improve for smaller firms that obtain credit primarily from banks. Banking institutions reported signs of improving credit quality. Improvements in household financial conditions were contributing to better performance of consumer loans. However, banks continued to report elevated losses on commercial real estate loans, especially construction and land development loans. Participants noted the risk of losses at financial institutions stemming from investors putting mortgages back to sellers if the quality of the loans was misrepresented when the mortgages were sold into securitization vehicles. Measures of price inflation had generally trended lower since the start of the recession; the same was true of nominal wage growth. Most participants indicated that underlying inflation was somewhat low relative to levels that they judged to be consistent with the Committee's statutory mandate to foster maximum employment and price stability. While underlying inflation remained subdued, meeting participants generally saw only small odds of deflation, given the stability of longer-term inflation expectations and the anticipated recovery in economic activity. They generally did not expect appreciably higher inflation, either. While prices of some commodities and imported goods had risen recently, business contacts reported that they currently had little pricing power and that they would continue to seek productivity gains to offset higher input costs. Small wage increases, coupled with productivity gains, meant that unit labor costs were lower than a year earlier. Many participants pointed to substantial slack in resource utilization, along with well-anchored inflation expectations, as likely to contribute to subdued inflation for some time. A few participants expected that continuing resource slack would lead to some further disinflation in coming years. However, a few others thought that the exceptionally accommodative stance of monetary policy, coupled with rising prices of energy and other commodities as well as rising prices of other imports, made it more likely that inflation would increase, within a year or two, to levels they judged consistent with the Committee's dual mandate. Participants generally agreed that the most likely economic outcome would be a gradual pickup in growth with slow progress toward maximum employment. They also generally expected that inflation would remain, for some time, below levels the Committee considers most consistent, over the longer run, with maximum employment and price stability. However, participants held a range of views about the risks to that outlook. Most saw the risks to growth as broadly balanced, but many saw the risks as tilted to the downside. Similarly, a majority saw the risks to inflation as balanced; some, however, saw downside risks predominating while a couple saw inflation risks as tilted to the upside. Participants also differed in their assessments of the likely benefits and costs associated with a program of purchasing additional longer-term securities in an effort to provide additional monetary stimulus, though most saw the benefits as exceeding the costs in current circumstances. Most participants judged that a program of purchasing additional longer-term securities would put downward pressure on longer-term interest rates and boost asset prices; some observed that it could also lead to a reduction in the foreign exchange value of the dollar. Most expected these changes in financial conditions to help promote a somewhat stronger recovery in output and employment while also helping return inflation, over time, to levels consistent with the Committee's mandate. In addition, several participants argued that the stimulus provided by additional securities purchases would help protect against further disinflation and the small probability that the U.S. economy could fall into persistent deflation--an outcome that they thought would be very costly. Some participants, however, anticipated that additional purchases of longer-term securities would have only a limited effect on the pace of the recovery; they judged that the economy's slow growth largely reflected the effects of factors that were not likely to respond to additional monetary policy stimulus and thought that additional action would be warranted only if the outlook worsened and the odds of deflation increased materially. Some participants noted concerns that additional expansion of the Federal Reserve's balance sheet could put unwanted downward pressure on the dollar's value in foreign exchange markets. Several participants saw a risk that a further increase in the size of the Federal Reserve's asset portfolio, with an accompanying increase in the supply of excess reserves and in the monetary base, could cause an undesirably large increase in inflation. However, it was noted that the Committee had in place tools that would enable it to remove policy accommodation quickly if necessary to avoid an undesirable increase in inflation. Committee Policy Action Though the economic recovery was continuing, members considered progress toward meeting the Committee's dual mandate of maximum employment and price stability as having been disappointingly slow. Moreover, members generally thought that progress was likely to remain slow. Accordingly, most members judged it appropriate to take action to promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with the Committee's mandate. In their discussion of monetary policy for the period immediately ahead, nearly all Committee members agreed to keep the federal funds rate at its effective lower bound by maintaining the target range for that rate at 0 to 1/4 percent and to expand the Federal Reserve's holdings of longer-term securities. To increase its securities holdings, the Committee decided to continue its existing policy of reinvesting principal payments from its securities holdings into longer-term Treasury securities and intended to purchase a further $600 billion of longer-term Treasury securities at a pace of about $75 billion per month through the second quarter of 2011. One member dissented from this action, judging that the risks of additional securities purchases outweighed the benefits. Members agreed that the Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster its goals of maximum employment and price stability. With respect to the statement to be released following the meeting, members agreed that it was appropriate to adjust the statement to make it clear that the unemployment rate was elevated, and that measures of underlying inflation were somewhat low, relative to levels that the Committee judged to be consistent, over the longer run, with its dual mandate. Nearly all members agreed that the statement should reiterate the expectation that economic conditions were likely to warrant exceptionally low levels of the federal funds rate for an extended period. Members agreed that the statement should note that the Committee will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to execute purchases of longer-term Treasury securities by the end of June 2011 in order to increase the total face value of domestic securities held in the System Open Market Account to approximately $2.6 trillion. The Committee also directs the Desk to reinvest principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability." The vote encompassed approval of the statement below to be released at 2:15 p.m.: "Information received since the Federal Open Market Committee met in September confirms that the pace of recovery in output and employment continues to be slow. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. Housing starts continue to be depressed. Longer-term inflation expectations have remained stable, but measures of underlying inflation have trended lower in recent quarters. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been disappointingly slow. To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate." Voting for this action: Ben Bernanke, William C. Dudley, James Bullard, Elizabeth Duke, Sandra Pianalto, Sarah Bloom Raskin, Eric Rosengren, Daniel K. Tarullo, Kevin Warsh, and Janet L. Yellen. Voting against this action: Thomas M. Hoenig. Mr. Hoenig dissented because he judged that additional accommodation would do little to accelerate the economy's continuing, gradual recovery. In his assessment, the risks of additional purchases of Treasury securities outweighed the benefits. Mr. Hoenig believed that additional purchases would risk a further misallocation of resources and future financial imbalances that could destabilize the economy. He also saw a potential for additional purchases to undermine the Federal Reserve's independence and cause long-term inflation expectations to rise. Mr. Hoenig also believed it was not appropriate to indicate that economic and financial conditions were "likely to warrant exceptionally low levels of the federal funds rate for an extended period" or to reinvest principal payments from agency debt and mortgage-backed securities in long-term Treasury securities. In his assessment, this continued high level of monetary policy accommodation could put at risk the achievement of the Committee's long-run policy objectives. It was agreed that the next meeting of the Committee would be held on Tuesday, December 14, 2010. The meeting adjourned at 1:15 p.m. on November 3, 2010. Notation Vote By notation vote completed on October 8, 2010, the Committee unanimously approved the minutes of the FOMC meeting held on September 21, 2010. Videoconference Meeting of October 15 The Committee met by videoconference on October 15 to discuss issues associated with its monetary policy framework, including alternative ways to express and communicate the Committee's objectives, possibilities for supplementing the Committee's communication about its policy decisions, the merits of smaller and more frequent adjustments in the Federal Reserve's intended securities holdings versus larger and less frequent adjustments, and the potential costs and benefits of targeting a term interest rate. The agenda did not contemplate any policy decisions and none were taken. Participants agreed that greater public understanding of the Committee's interpretation of its statutory objectives could contribute to better macroeconomic outcomes. Participants expressed a range of views about the potential costs and benefits of quantifying the Committee's interpretation of its statutory mandate to promote price stability by adopting a numerical inflation objective or a target path for the price level. In the end, participants noted that the longer-run projections contained in the Summary of Economic Projections, which is released once per quarter in conjunction with the minutes of four of the Committee's meetings, convey considerable information about participants' assessments of their statutory objectives. Participants discussed whether it might be useful for the Chairman to hold occasional press briefings to provide more detailed information to the public regarding the Committee's assessment of the outlook and its policy decisionmaking than is included in Committee's short post-meeting statements. In their discussion of the relative merits of smaller and more frequent adjustments versus larger and less frequent adjustments in the Federal Reserve's intended securities holdings, participants generally agreed that large adjustments had been appropriate when economic activity was declining sharply in response to the financial crisis. In current circumstances, however, most saw advantages to a more incremental approach that would involve smaller changes in the Committee's holdings of securities calibrated to incoming data. Finally, participants discussed the potential benefits and costs of setting a target for a term interest rate. Some noted that targeting the yield on a term security could be an effective way to reduce longer-term interest rates and thus provide additional stimulus to the economy. But participants also noted potentially large risks, including the risk that the Federal Reserve might find itself buying undesirably large amounts of the relevant security in order to keep its yield close to the target level. _____________________________ William B. English Secretary Return to top

2010-11-03

Statement

Information received since the Federal Open Market Committee met in September confirms that the pace of recovery in output and employment continues to be slow. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. Housing starts continue to be depressed. Longer-term inflation expectations have remained stable, but measures of underlying inflation have trended lower in recent quarters. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been disappointingly slow. To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate.  Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Sandra Pianalto; Sarah Bloom Raskin; Eric S. Rosengren; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen. Voting against the policy was Thomas M. Hoenig. Mr. Hoenig believed the risks of additional securities purchases outweighed the benefits. Mr. Hoenig also was concerned that this continued high level of monetary accommodation increased the risks of future financial imbalances and, over time, would cause an increase in long-term inflation expectations that could destabilize the economy. Statement from Federal Reserve Bank of New York

N/A

Minute

A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors in Washington, D.C., on Tuesday, November 2, 2010, at 1:00 p.m. and continued on Wednesday, November 3, 2010, at 9:00 a.m. PRESENT: Ben Bernanke, Chairman William C. Dudley, Vice Chairman James Bullard Elizabeth Duke Thomas M. Hoenig Sandra Pianalto Sarah Bloom Raskin Eric Rosengren Daniel K. Tarullo Kevin Warsh Janet L. Yellen Christine Cumming, Charles L. Evans, Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, Alternate Members of the Federal Open Market Committee Jeffrey M. Lacker and Dennis P. Lockhart, Presidents of the Federal Reserve Banks of Richmond and Atlanta, respectively John F. Moore, First Vice President, Federal Reserve Bank of San Francisco William B. English, Secretary and Economist Deborah J. Danker, Deputy Secretary Matthew M. Luecke, Assistant Secretary David W. Skidmore, Assistant Secretary Michelle A. Smith, Assistant Secretary Scott G. Alvarez, General Counsel Thomas C. Baxter, Deputy General Counsel Nathan Sheets, Economist David J. Stockton, Economist James A. Clouse, Thomas A. Connors, Jeff Fuhrer, Steven B. Kamin, Simon Potter, Lawrence Slifman, Christopher J. Waller, and David W. Wilcox, Associate Economists Brian Sack, Manager, System Open Market Account Patrick M. Parkinson, Director, Division of Bank Supervision and Regulation, Board of Governors Nellie Liang, Director, Office of Financial Stability Policy and Research, Board of Governors William Nelson, Deputy Director, Division of Monetary Affairs, Board of Governors Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors Charles S. Struckmeyer, Deputy Staff Director, Office of the Staff Director, Board of Governors Seth B. Carpenter and Andrew T. Levin, Senior Associate Directors, Division of Monetary Affairs, Board of Governors; Michael Leahy, Senior Associate Director, Division of International Finance, Board of Governors; David Reifschneider, Senior Associate Director, Division of Research and Statistics, Board of Governors Stephen A. Meyer, Senior Adviser, Division of Monetary Affairs, Board of Governors Daniel M. Covitz and David E. Lebow, Deputy Associate Directors, Division of Research and Statistics, Board of Governors; Gretchen C. Weinbach, Deputy Associate Director, Division of Monetary Affairs, Board of Governors Brian J. Gross, Special Assistant to the Board, Office of Board Members, Board of Governors Mark A. Carlson, Economist, Division of Monetary Affairs, Board of Governors Randall A. Williams, Records Management Analyst, Division of Monetary Affairs, Board of Governors Sarah G. Green, First Vice President, Federal Reserve Bank of Richmond Loretta J. Mester, Harvey Rosenblum, Daniel G. Sullivan, and John C. Williams, Executive Vice Presidents, Federal Reserve Banks of Philadelphia, Dallas, Chicago, and San Francisco, respectively David Altig, Richard P. Dzina, Mark E. Schweitzer, and Kei-Mu Yi, Senior Vice Presidents, Federal Reserve Banks of Atlanta, New York, Cleveland, and Minneapolis, respectively Todd E. Clark, Vice President, Federal Reserve Bank of Kansas City Robert L. Hetzel, Senior Economist, Federal Reserve Bank of Richmond The meeting opened with a short discussion regarding communicating with the public about monetary policy deliberations and decisions. Meeting participants supported a review of the Committee's communication guidelines with the aim of ensuring that the public is well informed about monetary policy issues while preserving the necessary confidentiality of policy discussions until their scheduled release. Governor Yellen agreed to chair a subcommittee to conduct such a review. Developments in Financial Markets and the Federal Reserve's Balance Sheet The Manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets since the Committee met on September 21, 2010. He also reported on System open market operations, including the continuing reinvestment into longer-term Treasury securities of principal payments received on the SOMA's holdings of agency debt and agency-guaranteed mortgage-backed securities (MBS). The Open Market Desk at the Federal Reserve Bank of New York purchased a total of about $65 billion of Treasury securities since the Committee decided, on August 10, to begin reinvesting such principal payments. Purchases were concentrated in nominal Treasury securities with maturities of 2 to 10 years, though some shorter-term and some longer-term securities were purchased along with some Treasury inflation-protected securities (TIPS). Over the intermeeting period, the Desk also conducted a number of small-value tri-party reverse repurchase operations with the primary dealers and with money market mutual funds that have been accepted as counterparties for such operations; these transactions, which the Desk conducted to ensure continuing operational and systems readiness, used Treasury securities, agency debt, and agency-guaranteed MBS as collateral. In addition, the Federal Reserve conducted another small-value auction of term deposits to ensure the continued operational readiness of the term deposit facility and to increase the familiarity of eligible depository institutions with the auction procedures. There were no open market operations in foreign currencies for the System's account over the intermeeting period. By unanimous vote, the Committee ratified the Desk's transactions over the intermeeting period. The Manager described the tentative plans the Desk had prepared for implementing a possible Committee decision to expand further the System's holdings of longer-term Treasury securities. Purchases would continue to be concentrated in nominal Treasury securities with remaining maturities between 2 and 10 years, with some purchases of shorter- and longer-term securities and of TIPS; with this maturity distribution, newly purchased securities would be expected to have an average duration of 5 to 6 years, essentially the same as the average duration of the System's existing holdings of Treasury securities. The Desk planned to publish additional information about its transactions to increase the transparency of, and encourage wider participation in, future purchase operations. The Desk judged that if it continued reinvesting principal payments from the Federal Reserve System's holdings of agency debt and agency MBS in longer-term Treasury securities, then it could purchase additional longer-term Treasury securities at a pace of about $75 billion per month while avoiding disruptions in market functioning. The Manager indicated that implementing a sizable increase in the System's holdings of Treasury securities most effectively likely would entail a temporary relaxation of the 35 percent per-issue limit on SOMA holdings under which the Desk had been operating; whether, and to what extent, the System's holdings of some issues would exceed 35 percent would depend on the specific securities that dealers choose to offer at future auctions. Finally, the Manager summarized the implications for the Federal Reserve's balance sheet and income statement of alternative decisions that the Committee might make about the size and maturity distribution of the SOMA's securities holdings. Participants discussed the Desk's tentative operational plans; they also discussed the potential effects of an expansion of the System's holdings of longer-term securities on financial markets and institutions and on the economy, and the channels through which those effects could occur. Staff Review of the Economic Situation The information reviewed at the November 2-3 meeting indicated that the economic recovery proceeded at a modest rate in recent months, with only a gradual improvement in labor market conditions, and was accompanied by a continued low rate of inflation. Consumer spending, business investment in equipment and software, and exports posted further gains in the third quarter, and nonfarm inventory investment stepped up. But construction activity in both the residential and nonresidential sectors remained depressed, and a significant portion of the rise in domestic demand was again met by imports. U.S. industrial production slowed noticeably in August and September, hiring at private businesses remained modest, and the unemployment rate stayed elevated. Headline consumer price inflation was subdued in recent months, despite a rise in energy prices, as core consumer price inflation trended lower. Private businesses continued to increase their demand for labor only modestly. In September, private nonfarm payroll employment remained on a gradual uptrend, and the average workweek of all private-sector employees was unchanged for a third month. In addition, the number of individuals working part time for economic reasons moved back up for a second month, and the available measures of job openings and hiring were still low. The unemployment rate remained at 9.6 percent in September, leaving the average rate for the third quarter only slightly below its average over the first half of the year. Long-duration unemployment continued to recede somewhat but was still very high. Indicators of layoffs remained elevated, although initial claims for unemployment insurance drifted down a little during October. The labor force participation rate in September was unchanged at a level lower than earlier in the year. After rising rapidly from mid-2009 to mid-2010, industrial production decelerated in August and edged down in September. In the manufacturing sector, output gains across a wide range of industries were smaller in recent months, and capacity utilization leveled off at a rate still well below its longer-run average. Production of motor vehicles picked up during the third quarter as automakers replenished dealers' stocks, but motor vehicle assemblies were scheduled to drop back in coming months. More broadly, October surveys of new orders received by manufacturers suggested that demand for factory goods had continued to increase. Real personal consumption expenditures (PCE) rose at a moderate rate in the third quarter. Rising equity prices likely resulted in some further improvement in net worth over the same period. However, real disposable personal income, which rose strongly in the first half of the year, increased only slightly in the third quarter. As a result, the personal saving rate dropped back somewhat in the third quarter, although it remained near the high levels that have prevailed since late 2008. Bank lending standards were still relatively tight, and household borrowing remained low. Surveys taken in September and October indicated that consumers were slightly more pessimistic about the economic outlook than earlier in the year. Activity in the housing market remained exceptionally weak. Although sales of new and existing homes turned up in August and September, the still-low level of demand suggested that the payback for the earlier boost to sales from the homebuyer tax credit had not yet faded. Moreover, despite further declines in mortgage interest rates in recent months, other factors continued to restrain housing demand, including consumer pessimism about the outlook for jobs and income, the depressed rate of household formation, and tight underwriting standards for mortgages. In addition, the moratoriums recently announced by some banks on the sale of properties they had seized in foreclosures were likely to damp home sales further in the near term. Starts of new single-family houses rose somewhat in August and September, but the pace of construction was still noticeably below the already-depressed level of the preceding year. New homebuilding appeared to be weighed down by the backlog of unsold existing homes and tight lending conditions for acquisition, development, and construction loans. After a very strong increase in the first half of the year, business investment in equipment and software posted a smaller, but still solid, gain in the third quarter. Nominal shipments of nondefense capital goods from domestic manufacturers remained on a moderate uptrend through September. But rising demand for equipment and software during the third quarter was also satisfied in part by a further rise in imports of capital goods. Near-term indicators of business spending on equipment and software were generally positive. New orders for nondefense capital goods, excluding aircraft, continued to outpace shipments through September. Credit conditions improved further in the third quarter, particularly for larger firms with access to the capital markets. Financing flows to smaller firms, which are more dependent on banks, were more subdued. Real nonfarm inventory investment was estimated to have picked up during the third quarter. Rebuilding of dealers' stocks of motor vehicles accounted for part of the step-up, but some of it likely reflected another large increase in imports. In August, inventory-to-sales ratios for most industries remained well below their previous peaks. Surveys of purchasing managers in September and October indicated that most did not perceive their customers' inventories to be too high. Business investment in nonresidential structures was about flat in the third quarter as another strong increase in spending for drilling and mining structures offset further declines in outlays on commercial and industrial buildings. Consumer price inflation remained low in recent months. The total PCE price index increased slightly in September as consumer energy prices moved up noticeably for a third month. The core PCE price index was unchanged in September, and the 12-month increase in this index continued to trend down. At earlier stages of processing, the rise in producer prices for intermediate materials remained moderate in September, but prices of globally traded industrial and agricultural commodities accelerated considerably in October, reflecting in part the lower foreign exchange value of the dollar as well as concerns about supply for certain commodities. In September and October, survey measures of households' short- and long-term expectations for inflation remained in the ranges that have prevailed since the spring of 2009. Labor compensation rose at a moderate rate in the third quarter. Private-sector wage increases, as measured by both average hourly earnings of all employees and the employment cost index (ECI), remained subdued. However, according to the ECI, employer benefit costs accelerated this year after posting a very small increase in 2009. The U.S. international trade deficit widened in August, after narrowing in July, as a modest increase in nominal exports was more than offset by a strong increase in imports. Following widespread declines in July, most major categories of imports rebounded in August, with imports of consumer goods and capital goods exhibiting particular strength. Imports of petroleum products also increased substantially, reflecting both higher volumes and higher prices. The increase in exports was concentrated in agricultural goods, partly boosted by rising prices, and in services; most other major categories either declined or were flat. Recent indicators of foreign economic activity suggested that growth abroad had slowed appreciably after midyear. Following an unsustainably high rate of expansion in the second quarter, growth of real gross domestic product (GDP) in the emerging market economies appeared to have slowed markedly, notwithstanding an apparent acceleration in economic activity in China. Real GDP growth apparently moderated in the advanced foreign economies as well. In the euro area, industrial production rose sharply in August, but purchasing managers indexes moved down in recent months. The German economy continued to perform strongly, while recent data showed weakness in the peripheral euro-area countries. A reacceleration of food and energy prices helped push up inflation abroad, albeit generally to still-moderate levels, in the third quarter. Staff Review of the Financial Situation The decision by the Federal Open Market Committee (FOMC) at its September meeting to maintain the 0 to 1/4 percent target range for the federal funds rate was widely anticipated. However, yields declined as market participants reportedly interpreted the language of the accompanying statement to imply higher odds of additional asset purchases and a longer period of exceptionally low short-term interest rates. Investors took particular note of the statement's indication that inflation was below the levels consistent with the FOMC's dual mandate for maximum employment and price stability. In the weeks following the FOMC meeting, Federal Reserve communications, along with economic data releases that continued to point to a tepid economic outlook, appeared to reinforce market expectations that additional policy accommodation would be forthcoming in the near term. Yields on nominal Treasury coupon securities and those on TIPS declined, on net, over the intermeeting period, largely in response to Federal Reserve communications and somewhat weaker-than-expected economic data releases. Five-year inflation compensation increased over the intermeeting period, and forward inflation compensation 5 to 10 years ahead also rose. Anecdotal reports pointed to the increased likelihood of additional asset purchases by the Federal Reserve and to FOMC communications noting that the Committee viewed underlying inflation as somewhat below the levels judged to be most consistent with the Committee's dual mandate as factors contributing to lower yields and to the increase in inflation compensation over the period. Yields on investment- and speculative-grade corporate bonds declined somewhat more than those on comparable-maturity Treasury securities, leaving risk spreads slightly lower. In the secondary market for syndicated leveraged loans, prices of loans continued to move up and bid-asked spreads narrowed a bit further. Conditions in short-term funding markets were generally stable over the intermeeting period. In dollar funding markets, spreads of term London interbank offered rates (or Libor) over those on overnight index swaps edged up but remained at levels similar to those observed prior to the emergence of euro-area concerns earlier this year. Spreads on unsecured financial commercial paper and on asset-backed commercial paper remained low. Rates on repurchase agreements (repos) involving various types of collateral were little changed on net. Bid-asked spreads in most repo transactions generally declined while changes in haircuts on different types of repo collateral were mixed. Broad U.S. stock price indexes rose, on balance, over the intermeeting period, reflecting investor expectations of further monetary policy accommodation and better-than-expected third-quarter earnings news; option-implied volatility on the S&P 500 index was little changed. The spread between the staff's estimate of the expected real return on equities over the next 10 years and an estimate of the expected real return on a 10-year Treasury note--a rough measure of the equity risk premium--narrowed a bit but remained at an elevated level. Bank stocks generally underperformed the broader market amid concerns about the handling of mortgage foreclosure documents and possible lack of compliance with securitization agreements. Net debt financing by U.S. nonfinancial corporations was very strong in September, with sizable gross corporate bond issuance across the credit spectrum and a substantial increase in commercial paper outstanding, but data for October pointed to a moderation in these flows. Issuance of syndicated leveraged loans in the third quarter remained near the average pace recorded in the first half of the year. Measures of the credit quality of nonfinancial corporations remained solid. The pace of gross public equity issuance from seasoned and initial public offerings by nonfinancial firms remained moderate in September and appeared to slow in October. Commercial real estate markets remained strained. Commercial mortgage debt in the third quarter was estimated to have declined at a rate similar to the drop in the second quarter, and the delinquency rate for securitized commercial mortgages continued to climb in September. However, some signals offered modest encouragement. In particular, vacancy rates for commercial buildings stabilized in the third quarter, and the pipeline of new commercial mortgage-backed securities picked up a bit from very low levels. Residential mortgage refinancing activity moved up in late September and early October, from an already high level, as the average interest rate on fixed-rate mortgages fell further over the intermeeting period. In contrast, the level of applications for mortgages to purchase homes remained anemic. Total consumer credit contracted in August at a pace roughly in line with the declines posted earlier in the year. Issuance of consumer asset-backed securities was solid in September. Consumer credit quality generally continued to improve, though delinquency rates remained elevated. Bank credit edged up in September and October, as brisk growth in banks' holdings of securities more than offset a further decline in total loans. Commercial and industrial (C&I) loans turned down in September after having increased slightly over the two previous months. A moderate net fraction of banks reported, in their responses to the October Senior Loan Officer Opinion Survey on Bank Lending Practices, that they had eased standards on C&I loans and narrowed spreads of C&I loan rates over their cost of funds; demand for such loans reportedly declined, on net, over the preceding three months. Commercial real estate loans, home equity loans, and consumer loans contracted. However, closed-end residential mortgage loans on banks' books increased modestly for the second month in a row. Over September and October, M2 expanded at an average annual rate that was noticeably above its pace earlier in the year. The growth rate of liquid deposits moved up, while small time deposits and retail money market mutual funds continued to contract. The compositional shift likely reflected the relatively attractive yields on liquid deposits. Currency growth strengthened, with indicators suggesting strong demand from abroad. The dollar declined about 3 percent against a broad array of other currencies during the intermeeting period, depreciating even more against the euro and the yen. In addition, Chinese authorities allowed the renminbi to appreciate slightly against the dollar. Market commentary highlighted the possibility that major central banks would further ease monetary policy, and the Bank of Japan expanded its asset purchase program and reduced its policy target rate to a range of 0 to 10 basis points. Benchmark 10-year sovereign yields generally declined in the major advanced foreign economies, but the overnight rate in the euro area increased as the European Central Bank continued to allow the amount of liquidity provided to the banking system to decline. Spreads relative to German bunds on the 10-year sovereign bonds of most peripheral euro-area countries either declined or were little changed over the period, but Irish sovereign spreads moved higher on concerns over the fiscal burdens associated with losses in the Irish banking sector. Major equity indexes in the euro area and in the United Kingdom increased moderately, whereas the Nikkei index declined. Several emerging market central banks tightened monetary policy, including the People's Bank of China. Against the backdrop of interest rate declines in many of the advanced economies, as well as heavy capital flows toward emerging market countries, many emerging market currencies strengthened, reportedly prompting further official intervention in foreign exchange markets. Staff Economic Outlook Because the recent data on production and spending were broadly in line with the staff's expectations, the forecast for economic activity that was prepared for the November FOMC meeting showed little change to the staff's near-term outlook relative to the forecast prepared for the September FOMC meeting. However, the staff revised up its forecast for economic activity in 2011 and 2012. In light of asset market developments over the intermeeting period, which in large part appeared to reflect heightened expectations among investors that the Federal Reserve would undertake additional purchases of longer-term securities, the November forecast was conditioned on lower long-term interest rates, higher stock prices, and a lower foreign exchange value of the dollar than was the staff's previous forecast. These factors were expected to provide additional support to the recovery in economic activity. Accordingly, the unemployment rate was anticipated to recede somewhat more than in the previous forecast, although the margin of slack at the end of 2011 was still expected to be substantial. The staff's forecast continued to show subdued rates of headline and core inflation during 2011 and 2012. However, the downward pressure on inflation from slack in resource utilization was expected to be slightly less than previously projected, and prices of imported goods were anticipated to rise somewhat faster. As in previous forecasts, further disinflation was expected to be checked by the ongoing stability of inflation expectations. Participants' Views on Current Conditions and the Economic Outlook In conjunction with this FOMC meeting, all meeting participants--the six members of the Board of Governors and the heads of the 12 Federal Reserve Banks--provided projections of output growth, the unemployment rate, and inflation for each year from 2010 through 2013 and over the longer run. Longer-run projections represent each participant's assessment of the rate to which each variable would be expected to converge, over time, under appropriate monetary policy and in the absence of further shocks. Participants' forecasts are described in the Summary of Economic Projections, which is attached as an addendum to these minutes. In their discussion of the economic situation and outlook, meeting participants generally agreed that the incoming data indicated that output and employment were continuing to increase, but only slowly. Progress toward the Committee's dual objectives of maximum employment and price stability was described as disappointingly slow. Participants variously noted a number of factors that were restraining growth, including low levels of household and business confidence, concerns about the durability of the economic recovery, continuing uncertainty about the future tax and regulatory environment, still-weak financial conditions of some households and small businesses, the depressed housing market, and waning fiscal stimulus. Although participants considered it quite unlikely that the economy would slide back into recession, some noted that continued slow growth and high levels of resource slack could leave the economic expansion vulnerable to negative shocks. In the absence of such shocks, and assuming appropriate monetary policy, participants' economic projections generally showed growth picking up to a moderate pace and the unemployment rate declining somewhat next year. Participants generally expected growth to strengthen further and unemployment to decline somewhat more rapidly in 2012 and 2013. Indicators of spending by households and businesses remained mixed. Consumer spending was expanding gradually. Participants noted that households were continuing their efforts to repair their balance sheets, a process that was restraining growth in consumer spending. Sluggish employment growth and elevated uncertainty about job prospects also continued to weigh on household spending. With respect to business spending, contacts generally reported that they were investing to reduce costs but were refraining from adding workers or expanding capacity in the United States. Energy producers were an exception. Participants observed that firms had generated rising profits, but that business contacts indicated those gains largely reflected cost-cutting rather than top-line growth in revenues. A number of businesses continued to report that they were holding back on hiring and capital spending because of uncertainty about future taxes, health-care costs, and regulations. But concerns about actual and anticipated demand also were important factors limiting investment and hiring. Firms continued to report strong foreign demand for their products, particularly from Asia. Participants noted that the housing sector, including residential construction and home sales, remained depressed. Foreclosures were adding to the elevated supply of available homes and putting downward pressure on home prices and housing construction. Some participants saw disputes over mortgage and foreclosure documents as likely to delay the eventual recovery in housing markets. Commercial real estate markets also were weak, and the availability of credit for commercial real estate transactions remained limited, but low interest rates were helping stabilize prices. Participants agreed that progress in reducing unemployment was disappointing; indeed, several noted that the recent rate of output growth, if continued, would more likely be associated with an increase than a decrease in the unemployment rate. Participants again discussed the extent to which employment was being held down, and the unemployment rate boosted, by structural factors such as mismatches between the skills of the workers who had lost their jobs and the skills needed in the sectors of the economy with vacancies, the inability of the unemployed to relocate because their homes were worth less than the principal they owed on their mortgages, and the effects of extended unemployment benefits on the duration of unemployed workers' search for a new job. Participants agreed that such factors were contributing to continued high unemployment but differed in their assessments of the magnitude of such effects. Many participants saw evidence that the current unemployment rate was well above levels that could be explained by structural factors alone, noting, for example, reports from business contacts indicating that weak growth in demand for their firms' products remained a key reason why they were reluctant to add employees, and job vacancy rates that were low relative to historical experience. A number of participants noted that continued high unemployment, particularly with large numbers of workers suffering very long spells of unemployment, would lead to an erosion of workers' skills that would have adverse consequences for those workers and for the economy's potential level of output in the longer term. Participants saw financial conditions as having become more supportive of growth over the course of the intermeeting period; most, though not all, of the change appeared to reflect investors' increasing anticipation of a further easing of monetary policy. Most longer-term nominal interest rates declined, real interest rates fell even more, credit spreads tightened, and equity prices rose, in part reflecting better-than-expected corporate earnings reports. Inflation compensation rose noticeably, returning to a level more typical of recent years. Participants noted that credit remained readily available--in debt markets and from banks--for larger corporations, and there were some signs that credit conditions had begun to improve for smaller firms that obtain credit primarily from banks. Banking institutions reported signs of improving credit quality. Improvements in household financial conditions were contributing to better performance of consumer loans. However, banks continued to report elevated losses on commercial real estate loans, especially construction and land development loans. Participants noted the risk of losses at financial institutions stemming from investors putting mortgages back to sellers if the quality of the loans was misrepresented when the mortgages were sold into securitization vehicles. Measures of price inflation had generally trended lower since the start of the recession; the same was true of nominal wage growth. Most participants indicated that underlying inflation was somewhat low relative to levels that they judged to be consistent with the Committee's statutory mandate to foster maximum employment and price stability. While underlying inflation remained subdued, meeting participants generally saw only small odds of deflation, given the stability of longer-term inflation expectations and the anticipated recovery in economic activity. They generally did not expect appreciably higher inflation, either. While prices of some commodities and imported goods had risen recently, business contacts reported that they currently had little pricing power and that they would continue to seek productivity gains to offset higher input costs. Small wage increases, coupled with productivity gains, meant that unit labor costs were lower than a year earlier. Many participants pointed to substantial slack in resource utilization, along with well-anchored inflation expectations, as likely to contribute to subdued inflation for some time. A few participants expected that continuing resource slack would lead to some further disinflation in coming years. However, a few others thought that the exceptionally accommodative stance of monetary policy, coupled with rising prices of energy and other commodities as well as rising prices of other imports, made it more likely that inflation would increase, within a year or two, to levels they judged consistent with the Committee's dual mandate. Participants generally agreed that the most likely economic outcome would be a gradual pickup in growth with slow progress toward maximum employment. They also generally expected that inflation would remain, for some time, below levels the Committee considers most consistent, over the longer run, with maximum employment and price stability. However, participants held a range of views about the risks to that outlook. Most saw the risks to growth as broadly balanced, but many saw the risks as tilted to the downside. Similarly, a majority saw the risks to inflation as balanced; some, however, saw downside risks predominating while a couple saw inflation risks as tilted to the upside. Participants also differed in their assessments of the likely benefits and costs associated with a program of purchasing additional longer-term securities in an effort to provide additional monetary stimulus, though most saw the benefits as exceeding the costs in current circumstances. Most participants judged that a program of purchasing additional longer-term securities would put downward pressure on longer-term interest rates and boost asset prices; some observed that it could also lead to a reduction in the foreign exchange value of the dollar. Most expected these changes in financial conditions to help promote a somewhat stronger recovery in output and employment while also helping return inflation, over time, to levels consistent with the Committee's mandate. In addition, several participants argued that the stimulus provided by additional securities purchases would help protect against further disinflation and the small probability that the U.S. economy could fall into persistent deflation--an outcome that they thought would be very costly. Some participants, however, anticipated that additional purchases of longer-term securities would have only a limited effect on the pace of the recovery; they judged that the economy's slow growth largely reflected the effects of factors that were not likely to respond to additional monetary policy stimulus and thought that additional action would be warranted only if the outlook worsened and the odds of deflation increased materially. Some participants noted concerns that additional expansion of the Federal Reserve's balance sheet could put unwanted downward pressure on the dollar's value in foreign exchange markets. Several participants saw a risk that a further increase in the size of the Federal Reserve's asset portfolio, with an accompanying increase in the supply of excess reserves and in the monetary base, could cause an undesirably large increase in inflation. However, it was noted that the Committee had in place tools that would enable it to remove policy accommodation quickly if necessary to avoid an undesirable increase in inflation. Committee Policy Action Though the economic recovery was continuing, members considered progress toward meeting the Committee's dual mandate of maximum employment and price stability as having been disappointingly slow. Moreover, members generally thought that progress was likely to remain slow. Accordingly, most members judged it appropriate to take action to promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with the Committee's mandate. In their discussion of monetary policy for the period immediately ahead, nearly all Committee members agreed to keep the federal funds rate at its effective lower bound by maintaining the target range for that rate at 0 to 1/4 percent and to expand the Federal Reserve's holdings of longer-term securities. To increase its securities holdings, the Committee decided to continue its existing policy of reinvesting principal payments from its securities holdings into longer-term Treasury securities and intended to purchase a further $600 billion of longer-term Treasury securities at a pace of about $75 billion per month through the second quarter of 2011. One member dissented from this action, judging that the risks of additional securities purchases outweighed the benefits. Members agreed that the Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster its goals of maximum employment and price stability. With respect to the statement to be released following the meeting, members agreed that it was appropriate to adjust the statement to make it clear that the unemployment rate was elevated, and that measures of underlying inflation were somewhat low, relative to levels that the Committee judged to be consistent, over the longer run, with its dual mandate. Nearly all members agreed that the statement should reiterate the expectation that economic conditions were likely to warrant exceptionally low levels of the federal funds rate for an extended period. Members agreed that the statement should note that the Committee will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to execute purchases of longer-term Treasury securities by the end of June 2011 in order to increase the total face value of domestic securities held in the System Open Market Account to approximately $2.6 trillion. The Committee also directs the Desk to reinvest principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability." The vote encompassed approval of the statement below to be released at 2:15 p.m.: "Information received since the Federal Open Market Committee met in September confirms that the pace of recovery in output and employment continues to be slow. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. Housing starts continue to be depressed. Longer-term inflation expectations have remained stable, but measures of underlying inflation have trended lower in recent quarters. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been disappointingly slow. To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate." Voting for this action: Ben Bernanke, William C. Dudley, James Bullard, Elizabeth Duke, Sandra Pianalto, Sarah Bloom Raskin, Eric Rosengren, Daniel K. Tarullo, Kevin Warsh, and Janet L. Yellen. Voting against this action: Thomas M. Hoenig. Mr. Hoenig dissented because he judged that additional accommodation would do little to accelerate the economy's continuing, gradual recovery. In his assessment, the risks of additional purchases of Treasury securities outweighed the benefits. Mr. Hoenig believed that additional purchases would risk a further misallocation of resources and future financial imbalances that could destabilize the economy. He also saw a potential for additional purchases to undermine the Federal Reserve's independence and cause long-term inflation expectations to rise. Mr. Hoenig also believed it was not appropriate to indicate that economic and financial conditions were "likely to warrant exceptionally low levels of the federal funds rate for an extended period" or to reinvest principal payments from agency debt and mortgage-backed securities in long-term Treasury securities. In his assessment, this continued high level of monetary policy accommodation could put at risk the achievement of the Committee's long-run policy objectives. It was agreed that the next meeting of the Committee would be held on Tuesday, December 14, 2010. The meeting adjourned at 1:15 p.m. on November 3, 2010. Notation Vote By notation vote completed on October 8, 2010, the Committee unanimously approved the minutes of the FOMC meeting held on September 21, 2010. Videoconference Meeting of October 15 The Committee met by videoconference on October 15 to discuss issues associated with its monetary policy framework, including alternative ways to express and communicate the Committee's objectives, possibilities for supplementing the Committee's communication about its policy decisions, the merits of smaller and more frequent adjustments in the Federal Reserve's intended securities holdings versus larger and less frequent adjustments, and the potential costs and benefits of targeting a term interest rate. The agenda did not contemplate any policy decisions and none were taken. Participants agreed that greater public understanding of the Committee's interpretation of its statutory objectives could contribute to better macroeconomic outcomes. Participants expressed a range of views about the potential costs and benefits of quantifying the Committee's interpretation of its statutory mandate to promote price stability by adopting a numerical inflation objective or a target path for the price level. In the end, participants noted that the longer-run projections contained in the Summary of Economic Projections, which is released once per quarter in conjunction with the minutes of four of the Committee's meetings, convey considerable information about participants' assessments of their statutory objectives. Participants discussed whether it might be useful for the Chairman to hold occasional press briefings to provide more detailed information to the public regarding the Committee's assessment of the outlook and its policy decisionmaking than is included in Committee's short post-meeting statements. In their discussion of the relative merits of smaller and more frequent adjustments versus larger and less frequent adjustments in the Federal Reserve's intended securities holdings, participants generally agreed that large adjustments had been appropriate when economic activity was declining sharply in response to the financial crisis. In current circumstances, however, most saw advantages to a more incremental approach that would involve smaller changes in the Committee's holdings of securities calibrated to incoming data. Finally, participants discussed the potential benefits and costs of setting a target for a term interest rate. Some noted that targeting the yield on a term security could be an effective way to reduce longer-term interest rates and thus provide additional stimulus to the economy. But participants also noted potentially large risks, including the risk that the Federal Reserve might find itself buying undesirably large amounts of the relevant security in order to keep its yield close to the target level. _____________________________ William B. English Secretary Return to top

2010-10-12

Minute

A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held in the offices of the Board of Governors in Washington, D.C., on Tuesday, September 21, 2010, at 8:00 a.m. PRESENT:  Ben Bernanke, Chairman William C. Dudley, Vice Chairman James Bullard Elizabeth Duke Thomas M. Hoenig Sandra Pianalto Eric Rosengren Daniel K. Tarullo Kevin Warsh Christine Cumming, Charles L. Evans, Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, Alternate Members of the Federal Open Market Committee Jeffrey M. Lacker, Dennis P. Lockhart, and Janet L. Yellen, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco, respectively William B. English, Secretary and Economist Deborah J. Danker, Deputy Secretary Matthew M. Luecke, Assistant Secretary David W. Skidmore, Assistant Secretary Michelle A. Smith, Assistant Secretary Scott G. Alvarez, General Counsel Thomas C. Baxter, Deputy General Counsel Nathan Sheets, Economist David J. Stockton, Economist Alan D. Barkema, James A. Clouse, Thomas A. Connors, Jeff Fuhrer, Steven B. Kamin, Lawrence Slifman, Mark S. Sniderman, Christopher J. Waller, and David W. Wilcox, Associate Economists Brian Sack, Manager, System Open Market Account Jennifer J. Johnson, Secretary of the Board, Office of the Secretary, Board of Governors Charles S. Struckmeyer, Deputy Staff Director, Office of the Staff Director, Board of Governors Maryann F. Hunter, Deputy Director, Division of Banking Supervision and Regulation, Board of Governors; William Nelson, Deputy Director, Division of Monetary Affairs, Board of Governors Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors David Reifschneider and William Wascher, Senior Associate Directors, Division of Research and Statistics, Board of Governors Eric M. Engen and Michael G. Palumbo, Deputy Associate Directors, Division of Research and Statistics, Board of Governors Brian J. Gross, Special Assistant to the Board, Office of Board Members, Board of Governors David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors Jennifer E. Roush, Senior Economist, Division of Monetary Affairs, Board of Governors Penelope A. Beattie, Assistant to the Secretary, Office of the Secretary, Board of Governors Randall A. Williams, Records Management Analyst, Division of Monetary Affairs, Board of Governors Gordon Werkema, First Vice President, Federal Reserve Bank of Chicago Harvey Rosenblum and Daniel G. Sullivan, Executive Vice Presidents, Federal Reserve Banks of Dallas and Chicago, respectively David Altig, John A. Weinberg, and Kei-Mu Yi, Senior Vice Presidents, Federal Reserve Banks of Atlanta, Richmond, and Minneapolis, respectively Chris Burke, John Fernald, James M. Nason, Vice Presidents, Federal Reserve Banks of New York, San Francisco, and Philadelphia, respectively Gauti B. Eggertsson, Research Officer, Federal Reserve Bank of New York By unanimous vote, the Committee selected Deborah J. Danker to serve as Deputy Secretary until the selection of a successor at the first regularly scheduled meeting of the Committee in 2011. Developments in Financial Markets and the Federal Reserve's Balance Sheet The Manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets during the period since the Committee met on August 10, 2010. He also reported on System open market operations during the intermeeting period, including the implementation of the Committee's decision at the August meeting to reinvest principal payments on agency debt and agency mortgage-backed securities (MBS) in longer-term Treasury securities. Following the August meeting, the Open Market Desk at the Federal Reserve Bank of New York announced that purchase operations would follow a schedule that would be released in the middle of each month, with the amounts calibrated to offset the amount of principal payments from agency debt and agency MBS expected to be received from the middle of the month to the middle of the following month. The Desk conducted 12 such operations over the intermeeting period and purchased about $28 billion of Treasury securities, with maturities concentrated in the 2- to 10-year sector of the nominal Treasury curve, although purchases were made across both the nominal and inflation-protected Treasury coupon yield curves. The Manager also briefed the Committee on progress in developing temporary reserve draining tools. Over the intermeeting period, the Federal Reserve announced a schedule for ongoing small-value auctions of term deposits. The auctions, which will be held about every other month, are intended to ensure the operational readiness of the term deposit facility and to increase the familiarity of eligible participants with the auction procedures. In addition, the Desk continued to conduct small-scale tri-party reverse repurchase operations using MBS collateral with the primary dealers, and it published a list of money market mutual funds that have been accepted as counterparties for reverse repurchase operations. The Manager also discussed plans to publish a new set of criteria that would allow a broader set of money market funds to become eligible counterparties. There were no open market operations in foreign currencies for the System's account over the intermeeting period. By unanimous vote, the Committee ratified the Desk's transactions over the intermeeting period. Staff Review of the Economic Situation The information reviewed at the September 21 meeting indicated that the pace of the economic expansion slowed in recent months and that inflation remained low. Private businesses increased employment modestly in August, but the length of the workweek was unchanged and the unemployment rate remained elevated. Industrial production advanced at a solid pace in July and rose further in August. Consumer spending continued to increase at a moderate rate in July and appeared to move up again in August. The rise in business outlays for equipment and software looked to have moderated recently following outsized gains in the first half of the year. Housing activity weakened further, and nonresidential construction remained depressed. After falling in the previous three months, headline consumer prices rose in July and August as energy prices retraced some of their earlier decline while prices for core goods and services edged up slightly. The labor market situation continued to improve only slowly. The average monthly increase in private payroll employment over the three months ending in August was small and was less than the average gain earlier in the year. Moreover, average weekly hours of all employees were little changed, on net, in recent months after rising during the first half of the year. The unemployment rate ticked up in August and remained close to the level that has prevailed since the beginning of this year. The labor force participation rate moved up a little in August but was still low. Initial claims for unemployment insurance remained at an elevated level over the intermeeting period. In addition, other indicators of labor demand, such as measures of hiring and job vacancies, did not improve. Industrial production increased solidly in July and then rose more moderately in August. Manufacturing production was boosted in July by a pickup in motor vehicle assemblies as automakers replenished lean stocks at dealers. However, the production of motor vehicles was pared back in August. More broadly, the output of high-technology items and other business equipment expanded at a solid pace in July and August. The output of utilities declined over the past two months after it was boosted by unseasonably hot weather in the preceding two months. Capacity utilization in manufacturing ticked up further in August from its mid-2009 low, but it was still substantially below its longer-run average. Real personal consumption expenditures rose modestly in July, similar to the average increase over the preceding two months. Data for retail sales and the sales of light motor vehicles pointed to a moderate gain in real consumer spending in August. Real disposable personal income declined a bit in July after increasing at a solid pace in the second quarter. The personal saving rate edged down in July but remained near the high level registered in the second quarter. Indicators of household net worth were mixed; home prices moved down in July, while equity prices inched up, on balance, over the intermeeting period. After falling back in July, consumer confidence remained downbeat in August and early September, with households more pessimistic about the outlook for their personal financial situations and general economic conditions. Housing activity, which had been supported earlier in the year by the availability of homebuyer tax credits, softened further in July. Sales of new single-family homes remained at a depressed level. Sales of existing homes fell substantially in July, and the index of pending home sales suggested that sales were muted in August. Starts of new single-family houses in July and August were below the low level seen in June, and the number of new permits issued in August appeared to signal that little improvement in new homebuilding was likely in September. House prices declined modestly in July after changing little, on net, in recent months. The interest rate for 30-year fixed-rate conforming mortgages remained essentially unchanged over the intermeeting period at a historically low level. Real business spending on equipment and software appeared to have slowed in July after expanding rapidly over the preceding three quarters. Both new orders and shipments of nondefense capital goods excluding aircraft dipped in July. Moreover, survey indicators of business conditions softened further in August. Incoming construction data indicated that business investment in nonresidential structures decreased in the second quarter but at a slower pace than over the preceding year. Increases in spending for drilling and mining structures were more than offset by continued declines in outlays for other types of nonresidential buildings. Despite some indications that the difficult financial conditions in commercial real estate markets might be stabilizing, credit was still tight and vacancy rates for office and commercial space remained high. In the second quarter, businesses appeared to build their inventories at a faster pace than earlier in the year, but ratios of inventories to sales for most industries did not point to any sizable overhangs. Inflation remained subdued in recent months. Headline consumer prices rose in July and August as energy prices rebounded after their decline over the previous three months. At the same time, prices for core goods and services moved up slightly. At earlier stages of production, producer prices of core intermediate materials moved down, on net, during July and August while most indexes of spot commodity prices increased. Survey measures of short- and long-term inflation expectations were essentially unchanged. Unit labor costs at the end of the second quarter remained below their level one year earlier, as labor compensation continued to increase only slowly and labor productivity stayed near its recent high level. Hourly labor compensation--as measured by compensation per hour in the nonfarm business sector and the employment cost index--rose modestly during the year ending in the second quarter. More recently, the year-over-year change in average hourly earnings of all employees in July and August remained subdued. While output per hour in the nonfarm business sector declined in the second quarter following large increases in the preceding three quarters, productivity was still well above its level one year earlier. The U.S. international trade deficit narrowed in July after widening in June. The rise in exports in July more than offset their decline in June, as overseas sales of capital goods rose sharply. Most other major categories of exports were little changed in July, although exports of automotive products posted their first decline since May 2009. The narrowing of the trade deficit in July also reflected a broad-based decline in imports following their large increase in June. Imports of consumer goods fell substantially in July, while imports of industrial supplies, capital goods, and automotive products also moved down. In contrast, imports of petroleum products remained about flat in July. Increases in foreign economic activity were robust, on average, in the second quarter. In particular, gross domestic product (GDP) grew strongly in the emerging market economies, even though gains in China apparently moderated. Among the advanced foreign economies, Europe posted a notable rise in economic activity in the second quarter; rapid expansion in Germany more than offset weaker outcomes in other euro-area economies, particularly those experiencing financial stress related to concerns about their fiscal situations and potential vulnerabilities in their banking sectors. In Canada and Japan, the rise in real GDP slowed noticeably in the second quarter. Recent indicators of foreign economic activity for the third quarter, including data on exports, production, and purchasing managers indexes, generally pointed to a slowing in the pace of expansion in economic activity abroad. Headline inflation rates in foreign economies generally were restrained in the second quarter by a deceleration in food and energy prices, but prices appeared to be rising a bit more rapidly of late. Staff Review of the Financial Situation The decision by the Federal Open Market Committee (FOMC) at its August meeting to maintain the 0 to 1/4 percent target range for the federal funds rate was widely anticipated, but Treasury yields declined as investors reportedly focused on the indication in the accompanying statement that principal payments from agency debt and MBS in the Federal Reserve's portfolio would be reinvested in longer-term Treasury securities and also on the characterization of the economic outlook, which was seen as somewhat more downbeat than expected. The expected path of the federal funds rate moved down early in the intermeeting period in response to weaker-than-expected economic data. The Chairman's Jackson Hole speech was reportedly viewed by market participants as more encouraging about economic prospects and as providing more clarity about the policy options available to the FOMC, but it did not have a sustained effect on policy expectations. The expected path of the federal funds rate rose for a time following the more-positive-than-expected data on manufacturing activity and the labor market released in early September, but the path ended the intermeeting period down on balance. Yields on nominal Treasury coupon securities were volatile and ended the period somewhat lower, particularly for intermediate- and longer-term maturities. In addition to Federal Reserve communications and news about the economic outlook, market participants pointed to strong demand for long-duration assets by institutional investors and speculation about additional large-scale asset purchases by the Federal Reserve as factors contributing to the drop in longer-term yields. Five-year inflation compensation based on Treasury inflation-protected securities (TIPS) fell, while forward inflation compensation 5 to 10 years ahead edged up, on net, over the intermeeting period but remained at a lower level than in the spring. Treasury auctions over the intermeeting period were generally well received. Yields on investment- and speculative-grade corporate bonds moved roughly in line with those on comparable-maturity Treasury securities, leaving risk spreads little changed. Measures of liquidity in secondary markets for corporate bonds remained stable. In the secondary market for syndicated leveraged loans, the average bid price moved up and bid-asked spreads edged down. Conditions in short-term funding markets continued to improve following the recent stresses related to concerns about financial stability in Europe. In dollar funding markets, spreads of term London interbank offered rates (or Libor) over those on overnight index swaps fell further at most horizons over the intermeeting period. Spreads on unsecured financial commercial paper were little changed at low levels. In secured funding markets, spreads on asset-backed commercial paper remained narrow, and rates on repurchase agreements involving various types of collateral held steady. In the September Senior Credit Officer Opinion Survey on Dealer Financing Terms (SCOOS), dealers indicated, on net, that they loosened credit terms applicable to several important classes of counterparties and types of collateral over the past three months amid increased demand for funding for most types of securities covered in the survey. Broad U.S. stock price indexes edged up, on balance, over the intermeeting period, and option-implied volatility on the S&P 500 index was little changed on net. The spread between the staff's estimate of the expected real return on equities over the next 10 years and an estimate of the expected real return on a 10-year Treasury note--a rough measure of the equity risk premium--remained at an elevated level. Bank stocks underperformed the broader equity market and continued to be more volatile, while credit default swap spreads for large banking organizations edged up. The greater volatility in bank stocks reportedly reflected, in part, the effects of domestic and international financial regulatory reform efforts. Net debt financing by U.S. nonfinancial corporations remained robust in August. Gross bond issuance was strong, a pattern that appeared to persist into the first part of September. Meanwhile, nonfinancial commercial paper outstanding contracted as very low yields on corporate bonds led to some substitution toward longer-term debt. Measures of the credit quality of nonfinancial corporations remained solid. The pace of initial public offerings and seasoned equity offerings by nonfinancial firms slowed in August, partly reflecting typical seasonal patterns. Commercial real estate markets continued to face difficult financial conditions, although some further signs emerged that this sector might be stabilizing. The prices of commercial properties appeared to have edged up in the first half of the year, and the volume of commercial real estate sales rose again in August. A few small commercial mortgage-backed securities (CMBS) deals were issued over the intermeeting period and were reportedly well received by investors, consistent with an easing of conditions and renewed interest in the CMBS market since the beginning of the year that was reported in the SCOOS. Nonetheless, the volume of CMBS issuance in 2010 remained quite low compared with the levels seen before the onset of the financial crisis, and total commercial mortgage debt continued to contract amid further increases in delinquency rates on commercial mortgages. For households, record-low mortgage rates supported a relatively high level of refinancing activity, but many borrowers reportedly remained unable to refinance because of insufficient home equity or poor credit histories. Consumer credit declined in the second quarter and appeared to contract further in July. Issuance of consumer asset-backed securities in August proceeded at a moderate pace that was similar to that posted in July. Spreads of interest rates on consumer loans relative to the yield on the two-year Treasury note were little changed on balance. The credit quality of consumer loans continued to improve; delinquency and charge-off rates for most types of loans dropped further in recent months, although they remained elevated. Bank credit expanded in August, reflecting significant purchases of Treasury securities and agency MBS by large banks. Bank loans continued to contract, but the pace of contraction slowed noticeably from earlier in the year. Commercial and industrial loans rose slightly in July, the first increase on a monthly basis since late 2008, and held steady in August. In addition, holdings of closed-end residential mortgage loans expanded moderately in August, reportedly spurred by refinancing activity. However, both home equity loans and commercial real estate loans contracted further in August, while consumer loans fell sharply. On average over July and August, M2 expanded at a rate slightly above its pace in the second quarter. Liquid deposits grew fairly rapidly over the two months, reflecting in part a compositional shift from other lower-yielding M2 assets. Currency trended higher, while small time deposits and retail money market mutual funds contracted further, as yields on these assets remained at extremely low levels. In foreign markets, concerns about the global economic outlook prompted substantial drops in equity prices and benchmark sovereign bond yields in many countries in August, and the dollar appreciated broadly on safe-haven demands. In September, however, as better economic news led to some improvement in investor sentiment, equity prices and bond yields moved back up, and the dollar retraced its earlier appreciation. Yield spreads relative to German bunds on the 10-year sovereign bonds of Greece, Ireland, and Portugal widened to near-record levels over the period. Moreover, euro-area bank stock prices fell on continued concerns about the condition of some troubled institutions. With the yen at a 15-year high against the dollar in nominal terms, Japan's Ministry of Finance intervened in currency markets on September 15 to buy dollars against yen, and the Bank of Japan (BOJ) noted that it would continue to provide ample liquidity. In reaction, the yen depreciated about 3 percent against the dollar, essentially reversing its rise over the preceding part of the intermeeting period. The European Central Bank (ECB) said that it would continue to provide term liquidity by offering several more full-allotment three-month refinancing operations through the end of the year. In contrast to the continued accommodative stance of the ECB and the BOJ, the Bank of Canada increased its target for the overnight rate by 25 basis points to 1 percent, its third hike since June. Several other central banks tightened monetary policy over the intermeeting period, including those of Chile, India, Indonesia, Sweden, and Thailand. Staff Economic Outlook In the economic forecast prepared for the September FOMC meeting, the staff lowered its projection for the increase in real economic activity over the second half of 2010. The staff also reduced slightly its forecast of growth next year but continued to anticipate a moderate strengthening of the expansion in 2011 as well as a further pickup in economic growth in 2012. The softer tone of incoming economic data suggested that the underlying level of demand was weaker than projected at the time of the August meeting. Moreover, the outlook for foreign economic activity also appeared a bit weaker. In the medium term, the recovery in economic activity was expected to receive support from accommodative monetary policy, further improvements in financial conditions, and greater household and business confidence. Over the forecast period, the increase in real GDP was projected to be sufficient to slowly reduce economic slack, although resource slack was anticipated to still remain elevated at the end of 2012. Overall inflation was projected to remain subdued, with the staff's forecasts for headline and core inflation little changed from the previous projection. The current and projected wide margins of economic slack were expected to contribute to a small slowing in core inflation in 2011, which was anticipated to be tempered by stable inflation expectations. Inflation was projected to change little in 2012, as considerable economic slack was expected to remain even as economic activity was anticipated to strengthen. Participants' Views on Current Conditions and the Economic Outlook In their discussion of the economic situation and outlook, meeting participants generally agreed that the incoming data indicated that output and employment were increasing only slowly and at rates well below those recorded earlier in the year. Although participants considered it unlikely that the economy would reenter a recession, many expressed concern that output growth, and the associated progress in reducing the level of unemployment, could be slow for some time. Participants noted a number of factors that were restraining growth, including low levels of household and business confidence, heightened risk aversion, and the still weak financial conditions of some households and small firms. A few participants noted that economic recoveries were often uneven and were typically slow following downturns triggered by financial crises. A number of participants observed that the sluggish pace of growth and continued high levels of slack left the economy exposed to potential negative shocks. Nevertheless, participants judged the economic recovery to be continuing and generally expected growth to pick up gradually next year. Indicators of spending by businesses and households were mixed. Several participants observed that data on retail sales had been a bit stronger than expected over the intermeeting period, although business contacts indicated that shoppers remained very price sensitive. There were some reports of retailers cautiously boosting inventories ahead of the holiday season by somewhat more than they did a year ago. Households were continuing efforts to repair their balance sheets by saving more and paying down debt. Participants noted that elevated uncertainty about employment prospects continued to weigh on consumption spending. Many businesses had built up large reserves of cash, in part by issuing long-term debt, but were refraining from adding workers or expanding plants and equipment. A number of business contacts indicated that they were holding back on hiring and spending plans because of uncertainty about future fiscal and regulatory policies. However, businesses also indicated that concerns about actual and anticipated demand were important factors limiting investment and hiring. Businesses reported continued strong foreign demand for their products, particularly from Asia. Participants noted that the housing sector, including residential construction and home sales, continued to be very weak. Despite efforts aimed at mitigation, fore-closures continued to add to the elevated supply of available homes, putting downward pressure on home prices and housing construction. Financial developments were mixed over the intermeeting period. Banks remained generally cautious and uncertain about the regulatory outlook, although investors appeared confident that U.S. banks could meet the new international standards for bank capital and liquidity that were announced over the intermeeting period. Improving household financial conditions were contributing to better consumer loan performance, and credit problems more broadly appeared to have mostly peaked, although banks continued to report elevated losses on commercial real estate loans, especially construction and land development loans. Credit remained readily available for larger corporations with access to financial markets, and there were some signs that credit conditions had begun to improve for smaller firms. Asset prices had been relatively sensitive to incoming economic data over the intermeeting period but generally ended the period little changed on net. Stresses in European financial markets remained broadly contained but bore watching going forward. A number of participants noted that the current sluggish pace of employment growth was insufficient to reduce unemployment at a satisfactory pace. Several participants reported feedback from business contacts who were delaying hiring until the economic and regulatory outlook became more certain. Participants discussed the possible extent to which the unemployment rate was being boosted by structural factors such as mismatches between the skills of the workers who had lost their jobs and the skills needed in the sectors of the economy with vacancies, the inability of the unemployed to relocate because their homes were worth less than their mortgages, and the effects of extended unemployment benefits. Participants agreed that factors like these were pushing the unemployment rate up, but they differed in their assessments of the extent of such effects. Nevertheless, many participants saw evidence that the current unemployment rate was considerably above levels that could be explained by structural factors alone, pointing, for example, to declines in employment across a wide range of industries during the recession, job vacancy rates that were relatively low, and reports that weak demand for goods and services remained a key reason why firms were adding employees only slowly. Inflation had declined since the start of the recession, and most participants indicated that underlying inflation was at levels somewhat below those that they judged to be consistent with the Committee's dual mandate for maximum employment and price stability. Although prices of some commodities and imported goods had risen recently, many business contacts reported that they currently had little pricing power and that they anticipated limited, if any, increases in labor costs. Meeting participants noted that several measures of inflation expectations had changed little, on net, over the intermeeting period and that analysis of the components of price indexes suggested disinflation might be abating. However, TIPS-based inflation compensation had declined, on balance, in recent quarters. While underlying inflation remained subdued, participants saw only small odds of deflation. Participants discussed the medium-term outlook for monetary policy and issues related to monetary policy implementation. Many participants noted that if economic growth remained too slow to make satisfactory progress toward reducing the unemployment rate or if inflation continued to come in below levels consistent with the FOMC's dual mandate, it would be appropriate to provide additional monetary policy accommodation. However, others thought that additional accommodation would be warranted only if the outlook worsened and the odds of deflation increased materially. Meeting participants discussed several possible approaches to providing additional accommodation but focused primarily on further purchases of longer-term Treasury securities and on possible steps to affect inflation expectations. Participants reviewed the likely benefits and costs associated with a program of purchasing additional longer-term assets--with some noting that the economic benefits could be small in current circumstances--as well as the best means to calibrate and implement such purchases. A number of participants commented on the important role of inflation expectations for monetary policy: With short-term nominal interest rates constrained by the zero bound, a decline in short-term inflation expectations increases short-term real interest rates (that is, the difference between nominal interest rates and expected inflation), thereby damping aggregate demand. Conversely, in such circumstances, an increase in inflation expectations lowers short-term real interest rates, stimulating the economy. Participants noted a number of possible strategies for affecting short-term inflation expectations, including providing more detailed information about the rates of inflation the Committee considered consistent with its dual mandate, targeting a path for the price level rather than the rate of inflation, and targeting a path for the level of nominal GDP. As a general matter, participants felt that any needed policy accommodation would be most effective if enacted within a framework that was clearly communicated to the public. The minutes of FOMC meetings were seen as an important channel for communicating participants' views about monetary policy. Committee Policy Action In their discussion of monetary policy for the period immediately ahead, nearly all of the Committee members agreed that it would be appropriate to maintain the target range for the federal funds rate of 0 to 1/4 percent and to leave unchanged the level of the combined holdings of Treasury, agency debt, and agency mortgage-backed securities in the SOMA. Although many members considered the recent and anticipated progress toward meeting the Committee's mandate of maximum employment and price stability to be unsatisfactory, members observed that incoming data over the intermeeting period indicated that the economic recovery was continuing, albeit slowly. Moreover, the data had been mixed, with readings early in the period generally weaker than anticipated but the more-recent data coming in on the strong side of expectations. In light of the considerable uncertainty about the current trajectory for the economy, some members saw merit in accumulating further information before reaching a decision about providing additional monetary stimulus. In addition, members wanted to consider further the most effective framework for calibrating and communicating any additional steps to provide such stimulus. Several members noted that unless the pace of economic recovery strengthened or underlying inflation moved back toward a level consistent with the Committee's mandate, they would consider it appropriate to take action soon. With respect to the statement to be released following the meeting, members agreed that it was appropriate to adjust the statement to make it clear that underlying inflation had been running below levels that the Committee judged to be consistent with its mandate for maximum employment and price stability, in part to help anchor inflation expectations. Nearly all members agreed that the statement should reiterate the expectation that economic conditions were likely to warrant exceptionally low levels of the federal funds rate for an extended period. One member, however, believed that continuing to communicate that expectation in the Committee's statement would create conditions that could lead to macroeconomic and financial imbalances. Members generally thought that the statement should note that the Committee was prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate. Such an indication accorded with the members' sense that such accommodation may be appropriate before long, but also made clear that any decisions would depend upon future information about the economic situation and outlook. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to maintain the total face value of domestic securities held in the System Open Market Account at approximately $2 trillion by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability." The vote encompassed approval of the statement below to be released at 2:15 p.m.: "Information received since the Federal Open Market Committee met in August indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. Housing starts are at a depressed level. Bank lending has continued to contract, but at a reduced rate in recent months. The Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be modest in the near term. Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to remain subdued for some time before rising to levels the Committee considers consistent with its mandate. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period. The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate." Voting for this action: Ben Bernanke, William C. Dudley, James Bullard, Elizabeth Duke, Sandra Pianalto, Eric Rosengren, Daniel K. Tarullo, and Kevin Warsh. Voting against this action: Thomas M. Hoenig. Mr. Hoenig dissented, emphasizing that the economy was entering the second year of moderate recovery and that, while the zero interest rate policy and "extended period" language were appropriate during the crisis and its immediate aftermath, they were no longer appropriate with the recovery under way. Mr. Hoenig also emphasized that, in his view, the current high levels of unemployment were not caused by high interest rates but by an extended period of exceptionally low rates earlier in the decade that contributed to the housing bubble and subsequent collapse and recession. He believed that holding rates artificially low would invite the development of new imbalances and undermine long-run growth. He would prefer removing the "extended period" language and thereafter moving the federal funds rate upward, consistent with his views at past meetings that it approach 1 percent, before pausing to determine what further policy actions were needed. Also, given current economic and financial conditions, Mr. Hoenig did not believe that continuing to reinvest principal payments from SOMA securities holdings was required to support the Committee's policy objectives. It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, November 2-3, 2010. The meeting adjourned at 1:10 p.m. on September 21, 2010. Notation Vote By notation vote completed on August 30, 2010, the Committee unanimously approved the minutes of the FOMC meeting held on August 10, 2010. _____________________________ William B. English Secretary Return to top

2010-09-21

Statement

Information received since the Federal Open Market Committee met in August indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. Housing starts are at a depressed level. Bank lending has continued to contract, but at a reduced rate in recent months. The Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be modest in the near term. Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to remain subdued for some time before rising to levels the Committee considers consistent with its mandate. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period. The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate. Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh. Voting against the policy was Thomas M. Hoenig, who judged that the economy continues to recover at a moderate pace. Accordingly, he believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted and will lead to future imbalances that undermine stable long-run growth. In addition, given economic and financial conditions, Mr. Hoenig did not believe that continuing to reinvest principal payments from its securities holdings was required to support the Committee’s policy objectives.

2010-08-31

Minute

A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held in the offices of the Board of Governors in Washington, D.C., on Tuesday, August 10, 2010, at 8:00 a.m. PRESENT: Ben Bernanke, Chairman William C. Dudley, Vice Chairman James Bullard Elizabeth Duke Thomas M. Hoenig Donald L. Kohn Sandra Pianalto Eric Rosengren Daniel K. Tarullo Kevin Warsh Christine Cumming, Charles L. Evans, Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, Alternate Members of the Federal Open Market Committee Jeffrey M. Lacker, Dennis P. Lockhart, and Janet L. Yellen, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco, respectively William B. English, Secretary and Economist Matthew M. Luecke, Assistant Secretary David W. Skidmore, Assistant Secretary Michelle A. Smith, Assistant Secretary Thomas C. Baxter, Deputy General Counsel Richard M. Ashton, Assistant General Counsel Nathan Sheets, Economist James A. Clouse, Thomas A. Connors, Steven B. Kamin, Lawrence Slifman, Mark S. Sniderman, and David W. Wilcox, Associate Economists Brian Sack, Manager, System Open Market Account Jennifer J. Johnson, Secretary of the Board, Office of the Secretary, Board of Governors Patrick M. Parkinson, Director, Division of Bank Supervision and Regulation, Board of Governors Robert deV. Frierson, Deputy Secretary, Office of the Secretary, Board of Governors Charles S. Struckmeyer, Deputy Staff Director, Office of the Staff Director for Management, Board of Governors William Nelson, Deputy Director, Division of Monetary Affairs, Board of Governors Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors Seth B. Carpenter, Senior Associate Director, Division of Monetary Affairs, Board of Governors; David Reifschneider and William Wascher, Senior Associate Directors, Division of Research and Statistics, Board of Governors Stephen A. Meyer, Senior Adviser, Division of Monetary Affairs, Board of Governors; Stephen D. Oliner, Senior Adviser, Division of Research and Statistics, Board of Governors Brian J. Gross, Special Assistant to the Board, Office of Board Members, Board of Governors Eric M. Engen, Assistant Director, Division of Research and Statistics, Board of Governors David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors John C. Driscoll and Jennifer E. Roush, Senior Economists, Division of Monetary Affairs, Board of Governors Penelope A. Beattie, Assistant to the Secretary, Office of the Secretary, Board of Governors Kimberley E. Braun, Records Project Manager, Division of Monetary Affairs, Board of Governors Randall A. Williams, Records Management Analyst, Division of Monetary Affairs, Board of Governors David Sapenero, First Vice President, Federal Reserve Bank of St. Louis Loretta J. Mester and Robert H. Rasche, Executive Vice Presidents, Federal Reserve Banks of Philadelphia and St. Louis, respectively David Altig, Ron Feldman, Craig S. Hakkio, Glenn D. Rudebusch, Daniel G. Sullivan, and Geoff Tootell, Senior Vice Presidents, Federal Reserve Banks of Atlanta, Minneapolis, Kansas City, San Francisco, Chicago, and Boston, respectively Linda Goldberg, Vice President, Federal Reserve Bank of New York Annmarie S. Rowe-Straker, Assistant Vice President, Federal Reserve Bank of New York Pia Orrenius, Research Officer, Federal Reserve Bank of Dallas Robert L. Hetzel, Senior Economist, Federal Reserve Bank of Richmond Developments in Financial Markets and the Federal Reserve's Balance Sheet The Manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets during the period since the Committee met on June 22-23, 2010. He also reported on System open market operations during the intermeeting period, noting that the Desk at the Federal Reserve Bank of New York had engaged in coupon swap transactions in agency mortgage-backed securities (MBS) to substantially reduce the number of the Committee's earlier agency MBS purchases that remained to be settled. In addition, the Manager briefed the Committee on the System's progress in developing tools for possible future reserve draining operations. The Federal Reserve successfully conducted two more small-value auctions of term deposits to confirm operational readiness for such auctions at the Federal Reserve and at the depository institutions that chose to participate. The Manager noted that the staff was developing plans for additional small-value tests of the Term Deposit Facility. In early August, the Federal Reserve successfully executed a few small-value term reverse repurchase operations, including the first the Federal Reserve conducted using agency MBS as collateral, to ensure operational readiness for such transactions at the Federal Reserve, the clearing banks, and the primary dealers. There were no open market operations in foreign currencies for the System's account over the intermeeting period. By unanimous vote, the Committee ratified the Desk's transactions over the intermeeting period. The Manager also noted the staff's projection that, if mortgage rates were to remain near their levels at the time of the meeting, repayments of principal on the agency MBS held in the SOMA likely would reduce the face value of those holdings by roughly $340 billion from August 2010 through the end of 2011. The level of repayments would be expected to increase further if mortgage rates were to decline from those levels. In addition, about $55 billion of agency debt held in the SOMA portfolio would mature over the same time frame. Staff Review of the Economic Situation The information reviewed at the August 10 meeting indicated that the pace of the economic recovery slowed in recent months and that inflation remained subdued. In addition, revised data for 2007 through 2009 from the Bureau of Economic Analysis showed that the recent recession was deeper than previously thought, and, as a result, the level of real gross domestic product (GDP) at the end of 2009 was noticeably lower than estimated earlier. Private employment increased slowly in June and July, and industrial production was little changed in June after a large increase in May. Consumer spending continued to rise at a modest rate in June, and business outlays for equipment and software moved up further. However, housing activity dropped back, and nonresidential construction remained weak. Additionally, the trade deficit widened sharply in May. A further decline in energy prices and unchanged prices for core goods and services led to a fall in headline consumer prices in June. Private nonfarm employment expanded slowly in recent months. The average monthly gain in private payroll employment during the three months ending in July was small, considerably less than the average increase over the preceding three months. However, average weekly hours of all employees continued to recover. The net addition of jobs in manufacturing and related industries, and in nonbusiness services such as health and education, continued to contribute importantly to the net increase in private employment. Employment in construction and financial activities fell further. The unemployment rate moved down in June from its level earlier in the year, and was unchanged in July, as declining civilian employment was accompanied by decreases in labor force participation. Initial claims for unemployment insurance remained at an elevated level over the intermeeting period. Industrial production was little changed in June after three months of strong increases. The output of utilities was boosted by unseasonably hot weather while manufacturing production declined. The drop in manufacturing output included a reduction in motor vehicle assemblies, but they were scheduled to increase noticeably in July. The June decrease in factory output also reflected weaker production in industries producing non-automotive consumer goods and construction and business supplies. The output of high-technology items and other business equipment continued to rise. Capacity utilization in manufacturing in June stood well above its mid-2009 low, but it was still substantially short of its longer-run average. Revised data indicated that consumer spending fell more sharply in 2008 and in the first half of 2009, and subsequently recovered more slowly, than previously estimated. Real personal consumption expenditures (PCE) rose gradually during the second quarter. Sales of light motor vehicles continued to move up, on balance, with the level of sales in July slightly higher than the second-quarter average. Real disposable personal income increased at a noticeably stronger pace than spending in recent months, and the personal saving rate moved up further from the upwardly revised level reported in the revisions to the national income and product accounts. Indicators of household net worth--such as stock prices and house prices--were little changed, on net, over the intermeeting period. Consumer confidence fell back in July, with households expressing greater concern about their personal finances and the outlook for the recovery. The housing market, which had been supported earlier in the year by activity associated with the homebuyer tax credits, was quite soft for a second consecutive month in June. Sales of new single-family homes rebounded some in June after their sharp drop in May, but they remained at a depressed level. Sales of existing homes fell for a second month in June, and the index of pending home sales suggested another decline in July. Starts of new single-family houses, which had dropped steeply in May, edged down in June to the lowest level since the spring of 2009. The low number of new permits issued in June appeared to signal that little improvement in new homebuilding was likely in July. House prices were largely stable, on balance, in recent months. The interest rate on 30-year fixed-rate conforming mortgages fell further during July, reaching a record low for the 39-year history of the series. Real business spending on equipment and software rose strongly again in the second quarter, with increases widespread across the categories of spending. New orders for nondefense capital goods excluding aircraft remained on a solid uptrend, although their three-month change for the period ending in June was less rapid than earlier in the year. Survey indicators of business conditions and sentiment softened in July but remained consistent with further gains in production and capital spending in the near term. Business investment in nonresidential structures turned up in the second quarter, with spending boosted by the rise in outlays for drilling and mining structures. The decline in spending for other types of nonresidential buildings appeared to be slowing, and there were a few signs that financial conditions in commercial real estate markets, though still difficult, were stabilizing. In the second quarter, businesses appeared to add to inventories at a faster rate. However, ratios of inventories to sales for most industries did not point to any sizable overhangs. Inflation remained subdued in recent months. Headline consumer prices declined in May and June because of sizable drops in consumer energy prices. At the same time, the core PCE price index moved up only slightly, and the year-over-year increase in the index in June was lower than earlier in the year. In recent months, prices of core consumer goods continued to decline while prices of non-energy services rose moderately. At earlier stages of production, producer prices of core intermediate materials fell back in June; in contrast, most indexes of spot commodity prices moved up during July. Inflation compensation based on Treasury inflation-protected securities moved down further over the intermeeting period, partly in response to softer-than-expected data on economic activity, but survey measures of short- and long-term inflation expectations were largely stable. Nominal hourly labor compensation--as measured by compensation per hour in the nonfarm business sector and the employment cost index--rose modestly during the year ending in the second quarter. Average hourly earnings of all employees rose slowly over the 12 months ending in July. Output per hour in the nonfarm business sector declined in the second quarter after rising rapidly in the preceding three quarters. On net, unit labor costs remained well below their level one year earlier. The U.S. international trade deficit widened sharply in May, as a significant increase in exports was more than offset by a surge in imports. The corresponding decline in real net exports made a significant negative contribution to U.S. GDP growth in the second quarter. The increase in exports was broadly based, with particular strength in exports of capital equipment. Imports of capital goods also were strong, as were imports of consumer goods and automotive products. In contrast, imports of petroleum products fell in May, held back by both lower prices and reduced volumes. Available data suggested that aggregate GDP growth in foreign economies remained strong in the second quarter. Recent indicators of economic activity for the euro area showed little imprint of the fiscal stresses that emerged in the spring. Industrial production continued to grow in May, with particularly solid gains in Germany and France, and purchasing managers indexes and economic sentiment turned up in July. In Japan, exports continued to support economic growth, even as indicators of household spending remained weak. Machinery orders declined in May, however, and industrial production moved down in June, suggesting some deceleration in economic activity. In the emerging market economies (EMEs), incoming data generally pointed to a moderation of economic growth, albeit to a still-solid pace, with a notable slowing in China in the second quarter. In other EMEs, purchasing managers indexes generally still pointed to expansions in manufacturing activity, though industrial production in many countries began to decelerate. In contrast, Mexican indicators suggested that economic activity rebounded in the second quarter after contracting in the first quarter. Headline inflation rates generally declined abroad, reflecting prior declines in oil and other commodity prices. Staff Review of the Financial Situation The decision taken by the Federal Open Market Committee (FOMC) at its June meeting to maintain the 0 to 1/4 percent target range for the federal funds rate was about in line with investor expectations and elicited little market reaction; the same was true of the wording of the accompanying statement. Over the intermeeting period, investors appeared to mark down the path for monetary policy in response to weaker-than-expected economic data releases and Federal Reserve communications that were read as suggesting that policymakers' concerns about the economic outlook had increased. Reflecting the same factors, yields on nominal Treasury coupon securities fell noticeably on net. Treasury auctions were generally well received, with bid-to-cover ratios mostly exceeding historical averages. Yields on investment- and speculative-grade corporate bonds decreased, and their spreads relative to yields on comparable-maturity Treasury securities declined moderately. Secondary-market bid prices on syndicated leveraged loans rose a bit, while bid-asked spreads in that market edged down. Conditions in short-term funding markets improved somewhat over the intermeeting period. Spreads of term London interbank offered rates (Libor) over rates on overnight index swaps moved down at most horizons, and liquidity in term funding markets reportedly increased. Spreads on unsecured commercial paper were little changed. In secured funding markets, spreads on asset-backed commercial paper moved down, while rates and haircuts on collateral for repurchase agreements involving Treasury and agency collateral held steady. Broad U.S. equity price indexes increased slightly, on net, as generally positive corporate earnings news and an easing of investors' worries about the potential effects of fiscal strains in Europe were partly offset by concerns about the strength of the economic recovery. Most firms in the S&P 500 reported second-quarter earnings that exceeded analysts' forecasts. Option-implied volatility on the S&P 500 index declined but remained somewhat elevated by historical standards. The spread between the staff's estimate of the expected real return on equities over the next 10 years and an estimate of the expected real return on a 10-year Treasury note--a rough measure of the equity risk premium--was little changed at an elevated level. Financial stock prices moved about in line with broader indexes, and credit default swap spreads for large financial institutions narrowed moderately. Gross bond issuance by U.S. investment-grade nonfinancial corporations rebounded in July from relatively subdued levels in May and June. Nonfinancial commercial paper outstanding also increased. Issuance of syndicated leveraged loans rose in the second quarter, but terms on such deals reportedly tightened somewhat. Measures of the credit quality of nonfinancial firms remained solid. Gross equity issuance was moderate in June and July. Prices of commercial real estate appeared to have increased in the second quarter, though the number of transactions was small. Nonetheless, commercial real estate markets remained under pressure. Delinquency rates for securitized commercial mortgages continued to rise in June, and commercial mortgage debt was estimated to have contracted by a sizable amount again in the second quarter. However, investor demand for high-quality commercial mortgage-backed securities (CMBS) reportedly was robust, although issuance of CMBS remained muted. Consumer credit contracted again in the second quarter, as revolving credit continued to decline and nonrevolving credit edged down. Issuance of consumer asset-backed securities slowed a bit in July, reflecting, in part, typical seasonal patterns. Consumer credit quality continued to show improvement. Delinquency and charge-off rates for most types of consumer loans moved down in recent months, although these rates remained elevated. Spreads of credit card interest rates over those on Treasury securities stayed elevated in May, while interest rate spreads on auto loans remained near their average level over the past decade. Commercial banks' core loans--the sum of commercial and industrial (C&I), real estate, and consumer loans--continued to contract in June and July. However, the recent runoff in core loans was appreciably smaller than the declines posted earlier in the year, reflecting a more modest contraction in C&I loans. The July Senior Loan Officer Opinion Survey on Bank Lending Practices showed, for the second straight quarter, that a small net fraction of respondents had eased standards for C&I loans over the previous three months. Commercial real estate loans continued to decline steeply in June and July, and residential real estate loans also decreased. Consumer loans at commercial banks were about flat, on balance, as reductions in credit card loans about offset an increase in nonrevolving consumer loans. Securities holdings by banks increased substantially in recent weeks. M2 was little changed in July after expanding slightly in the second quarter. Its subdued growth in recent months likely reflected a continued unwinding of earlier safe-haven flows as well as the very low rates of return on some components of M2, particularly small time deposits and retail money market mutual funds. In foreign exchange markets, the value of the dollar declined on balance over the intermeeting period, likely reflecting some reversal of flight-to-safety flows, better-than-expected European economic data, and the softer economic outlook for the United States. The release of the results of the European Union stress-test exercise, including data on European banks' exposures to sovereign debt, appeared to ease concerns about the potential for severe financial dislocations in Europe. Investors also seemed to take comfort from several oversubscribed auctions of government debt by Spain, Portugal, Ireland, and Greece. Accordingly, risk spreads on these governments' bonds, though elevated, generally declined, and European banks' access to dollar funding improved somewhat. The lack of any disruption to market functioning following the expiration, on July 1, of the European Central Bank's first one-year refinancing operation also supported investor sentiment. Market indicators of expectations for future overnight rates in the euro area shifted up during the period. No changes were made to policy interest rates in the euro area, the United Kingdom, or Japan. The Bank of Canada tightened policy a step further during the period, raising its target for the overnight rate 25 basis points to 3/4 percent. Notwithstanding the improved investor sentiment toward Europe, data releases pointing to lower-than-expected growth in economic activity in the United States and China may have weighed on global sovereign bond yields, which declined on net in Canada, Germany, the United Kingdom, and Japan. Equity prices, while up in Europe over the intermeeting period, were little changed in Canada and down in Japan. By contrast, share prices rose in emerging markets and flows into emerging market equity funds continued to be strong. The central banks of a number of EMEs, including Brazil, Chile, India, Malaysia, South Korea, Taiwan, and Thailand, increased policy interest rates. Staff Economic Outlook In the economic forecast prepared for the August FOMC meeting, the staff lowered its projection for the increase in real economic activity during the second half of 2010 but continued to anticipate a moderate strengthening of the expansion in 2011. The softer tone of incoming economic data suggested that the pace of the expansion would be slower over the near term than previously projected. Financial conditions, however, became somewhat more supportive of economic growth. Interest rates on Treasury securities, corporate bonds, and mortgages moved down further over the intermeeting period; the dollar reversed its April to June appreciation; and equity prices edged higher. Over the medium term, the recovery in economic activity was expected to receive support from accommodative monetary policy, further improvement in financial conditions, and greater household and business confidence. Over the forecast period, the increase in real GDP was projected to be sufficient to slowly reduce economic slack, although resource slack was still anticipated to remain quite elevated at the end of 2011. Overall inflation was projected to remain subdued over the next year and a half. The staff's forecasts for headline and core inflation in 2010 were revised up slightly in response to the higher prices of oil and other commodities and the depreciation of the dollar. Even so, the wide margin of economic slack was projected to contribute to some slowing in core inflation in 2011, though the extent of that slowing would be tempered by stable inflation expectations. Participants' Views on Current Conditions and the Economic Outlook In their discussion of the economic situation and outlook, meeting participants generally characterized the economic information received during the intermeeting period as indicating a slowing in the pace of recovery in output and employment in recent months. Real GDP growth was noticeably weaker in the second quarter of 2010 than most had anticipated, and monthly data suggested that the pace of recovery remained sluggish going into the third quarter. Private payrolls and consumer spending had risen less than expected. Business spending on equipment and software had increased strongly but reportedly was concentrated in replacements and upgrades that had been postponed during the economic downturn. Investment in nonresidential structures continued to be weak. Housing starts and sales remained at depressed levels, falling back after the expiration of the temporary homebuyer tax credits. The incoming data suggested that economic growth abroad had been somewhat stronger than anticipated and remained solid, boosting U.S. exports and supporting a pickup in U.S. manufacturing output and employment, though a surprising surge in imports in the second quarter widened the U.S. trade deficit. Conditions in financial markets had become somewhat more supportive of growth over the intermeeting period, in part reflecting perceptions of diminished risk of financial dislocations in Europe: Medium- and longer-term interest rates had fallen, some risk spreads had narrowed, and the decline in equity prices that had occurred in the months before the Committee's June meeting had been partly reversed. Moreover, participants saw some indications that credit conditions for households and smaller businesses were beginning to improve, albeit gradually. Thus, while they saw growth as likely to be more modest in the near term, participants continued to anticipate that growth would pick up in 2011. Revised national income and product account data showed that the contraction in aggregate output during the recent recession had been larger than previously reported. In particular, consumer spending had contracted more over the course of 2008 and the first half of 2009, and recovered less rapidly, than previously estimated, even as households' after-tax incomes had increased more than shown by the earlier data. In combination, these revisions indicated that the personal saving rate had been higher and had risen somewhat more during the past three years than previously thought. Participants recognized that the implications of these new data for the outlook were unclear. On the one hand, the revised data might indicate that households have made greater progress in repairing their balance sheets than had been realized, potentially allowing stronger growth in consumer spending as the recovery proceeds. On the other hand, the revised data might signify that households are seeking to raise their net worth more substantially than previously understood, or to build greater precautionary balances in what they perceive to be a more uncertain economic environment, with the result that growth in consumer spending could remain restrained for some time. Many participants noted that the protracted downturn in house prices and in residential investment seemed to have ended, although ups and downs in housing starts and home sales associated with the temporary tax credit for homebuyers made it difficult to be certain. A few commented that home sales and prices appeared to be edging up in their Districts. While recognizing that the housing sector likely had bottomed out, participants observed that large inventories of vacant and unsold homes, along with continuing foreclosures that would increase the number of houses for sale, likely would continue to damp residential construction, indicating that a sustained upturn from very low levels was not imminent. Business investment in equipment and software had grown at a robust pace, but growth in new orders for nondefense capital goods, though volatile from month to month, appeared to have stepped down. Many participants noted that capital investment was heavily concentrated in replacement investment and upgrades that firms had postponed during the economic downturn. A number of participants reported that business contacts again indicated that their uncertainty about the fiscal and regulatory environment made them reluctant to expand capacity. Other participants cited business surveys and reports from business contacts indicating that slow growth in sales and uncertainty about the strength and durability of the recovery likely were more important factors. Except in the extractive industries (drilling and mining), investment in nonresidential structures had continued to decline. The near-term outlook for commercial real estate investment remained weak despite a decline in vacancy rates in some markets. Participants agreed that credit conditions did not appear to be an important restraint on investment spending by larger firms that have access to the capital markets. Such firms were able to borrow readily and at relatively low rates; moreover, many businesses held substantial cash balances. In addition, survey results suggested that a sizable fraction of banks had eased loan terms, and a few had eased lending standards, on C&I loans. Some participants observed that small businesses continued to find credit hard to obtain. However, several participants noted recent survey evidence indicating that most small firms that requested credit were able to borrow, and that relatively few small firms thought that access to credit was their most important problem. Standards for commercial real estate loans and residential mortgages remained very tight, and banks did not appear to be easing standards on such loans. Some limited easing of lending standards was noted for consumer loans, but credit availability remained a constraint and consumer credit continued to contract. However, several participants noted that with credit quality improving, some bankers were more actively seeking loan growth, though the same bankers also indicated that the demand for loans remained weak. Many participants noted that European countries' efforts to address their fiscal imbalances, and the release of the results of the stress test of European banks along with information about their exposures to sovereign debt, had reduced investor concern about downside risks in Europe. These factors appeared to have supported improvements in financial markets both here and abroad. Moreover, growth in Europe and Asia apparently remained solid, boosting U.S. exports. Nonetheless, a continuation of strong foreign growth would require a pickup in private demand abroad to offset a decline in policy stimulus and a smaller boost from inventory investment. Several participants noted that the same shift in the sources of demand would need to take place in the United States: Waning fiscal stimulus on the part of the federal government and continuing retrenchment in spending by state and local governments would weigh on the economic recovery, and recent data raised questions as to whether private demand would strengthen enough to increase resource utilization. The incoming data on the labor market were weaker than meeting participants had anticipated. Private-sector payrolls grew sluggishly in recent months. The unemployment rate declined a bit, but that reflected a decrease in labor force participation rather than an increase in employment. Policymakers discussed a variety of factors that appeared to be contributing to the slow pace of job growth. A number of participants reported that business contacts again indicated that uncertainty about future taxes, regulations, and health-care costs made them reluctant to expand their workforces. Instead, businesses had continued to meet growth in demand for their products largely through productivity gains and by increasing existing employees' hours. Several participants suggested that structural factors such as mismatches between unemployed workers' skills and the needs of employers with job openings, or unemployed workers' inability to move to a new locale, were contributing to the elevated level and long average duration of unemployment. Other participants, while agreeing that such factors could restrain job growth and contribute to high rates of unemployment, noted that employment was lower than a year earlier and that job openings were only slightly above their lowest level in 10 years, indicating that few firms saw a need to add employees. Most participants viewed weak demand for firms' outputs as the primary problem; they saw substantial scope for stronger aggregate demand for goods and services to spur employment in a wide range of industries. Weighing the available information, participants again expected the recovery to continue and to gather strength in 2011. Nonetheless, most saw the incoming data as indicating that the economy was operating farther below its potential than they had thought, that the pace of recovery had slowed in recent months, and that growth would be more modest during the second half of 2010 than they had anticipated at the time of the Committee's June meeting. Some policymakers whose forecasts for growth had been in the low end of the range of participants' earlier projections viewed the recent data as consistent with their earlier forecasts for a weak recovery. A few participants, observing that month-to-month data releases are noisy and subject to revision, did not see the recent data as clearly indicating a change in the outlook. Many policymakers judged that downside risks to the U.S. recovery had become somewhat larger; a few saw the incoming data as suggesting a greater risk that private demand for goods and services might not grow enough to offset waning fiscal stimulus and a smaller impetus from inventory restocking. In contrast, most saw a reduced risk of financial turmoil in Europe and attendant spillovers to U.S. financial markets. Policymakers generally saw the inflation outlook as little changed. They observed that a range of measures continued to indicate subdued underlying inflation and that growth in wages and compensation remained quite moderate. Many said they expected underlying inflation to stay, for some time, below levels they judged most consistent with the dual mandate to promote maximum employment and price stability. Participants viewed the risk of deflation as quite small, but a number judged that the risk of further disinflation had increased somewhat despite the stability of longer-run inflation expectations. One noted that survey measures of longer-run inflation expectations had remained positive in Japan throughout that country's bout of deflation. A few saw the continuation of exceptionally accommodative monetary policy in the United States as posing some upside risk to inflation expectations and actual inflation in the medium run. Committee Policy Action In their discussion of monetary policy for the period ahead, Committee members agreed that it would be appropriate to maintain the target range of 0 to 1/4 percent for the federal funds rate. Members still saw the economic expansion continuing, and most believed that inflation was likely to stabilize near recent low readings in coming quarters and then gradually rise toward levels they consider more consistent with the Committee's dual mandate for maximum employment and price stability. Nonetheless, members generally judged that the economic outlook had softened somewhat more than they had anticipated, particularly for the near term, and some saw increased downside risks to the outlook for both growth and inflation. Some members expressed a concern that in this context any further adverse shocks could have disproportionate effects, resulting in a significant slowing in growth going forward. While no member saw an appreciable risk of deflation, some judged that the risk of further near-term disinflation had increased somewhat. More broadly, members generally saw both employment and inflation as likely to fall short of levels consistent with the dual mandate for longer than had been anticipated. Against this backdrop, the Committee discussed the implications for financial conditions and the economic outlook of continuing its policy of not reinvesting principal repayments received on MBS or maturing agency debt. The decline in mortgage rates since spring was generating increased mortgage refinancing activity that would accelerate repayments of principal on MBS held in the SOMA. Private investors would have to hold more longer-term securities as the Federal Reserve's holdings ran off, making longer-term interest rates somewhat higher than they would be otherwise. Most members thought that the resulting tightening of financial conditions would be inappropriate, given the economic outlook. However, members noted that the magnitude of the tightening was uncertain, and a few thought that the economic effects of reinvesting principal from agency debt and MBS likely would be quite small. Most members judged, in light of current conditions in the MBS market and the Committee's desire to normalize the composition of the Federal Reserve's portfolio, that it would be better to reinvest in longer-term Treasury securities than in MBS. While reinvesting in Treasury securities was seen as preferable given current market conditions, reinvesting in MBS might become desirable if conditions were to change. A few members worried that reinvesting principal from agency debt and MBS in Treasury securities could send an inappropriate signal to investors about the Committee's readiness to resume large-scale asset purchases. Another member argued that reinvesting repayments of principal from agency debt and MBS, thereby postponing a reduction in the size of the Federal Reserve's balance sheet, was likely to complicate the eventual exit from the period of exceptionally accommodative monetary policy and could have adverse macroeconomic consequences in future years. All but one member concluded that it would be appropriate to begin reinvesting principal received from agency debt and MBS held in the SOMA by purchasing longer-term Treasury securities in order to keep constant the face value of securities held in the SOMA and thus avoid the upward pressure on longer-term interest rates that might result if those holdings were allowed to decline. Several members emphasized that in addition to continuing to develop and test instruments to facilitate an eventual exit from the period of unusually accommodative monetary policy, the Committee would need to consider steps it could take to provide additional policy stimulus if the outlook were to weaken appreciably further. Given the softer tone of recent data and the more modest near-term outlook, members agreed that some changes to the statement's characterization of the economic and financial situation were necessary. All members but one judged that it was appropriate to reiterate the expectation that economic conditions--including low levels of resource utilization, subdued inflation trends, and stable inflation expectations--were likely to warrant exceptionally low levels of the federal funds rate for an extended period. One member argued that the recovery was proceeding about as outlined earlier this year and that starting a gradual process of removing policy accommodation fairly soon would better foster the Committee's long-run objectives of maximum employment and price stability. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to maintain the total face value of domestic securities held in the System Open Market Account at approximately $2 trillion by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities. The Committee directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability." The vote encompassed approval of the statement below to be released at 2:15 p.m.: "Information received since the Federal Open Market Committee met in June indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Bank lending has continued to contract. Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be more modest in the near term than had been anticipated. Measures of underlying inflation have trended lower in recent quarters and, with substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve's holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities.1 The Committee will continue to roll over the Federal Reserve's holdings of Treasury securities as they mature. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability. 1. The Open Market Desk will issue a technical note shortly after the statement providing operational details on how it will carry out these transactions." Return to text Voting for this action: Ben Bernanke, William C. Dudley, James Bullard, Elizabeth Duke, Donald L. Kohn, Sandra Pianalto, Eric Rosengren, Daniel K. Tarullo, and Kevin Warsh. Voting against this action: Thomas M. Hoenig. Mr. Hoenig dissented because he thought it was not appropriate to indicate that economic and financial conditions were "likely to warrant exceptionally low levels of the federal funds rate for an extended period" or to reinvest principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities. Mr. Hoenig felt that the "extended period" expectation could limit the Committee's flexibility to begin raising rates modestly in a timely fashion, and he believed that the recovery, which had entered its second year and was expected to continue at a moderate pace, did not require support from additional accommodation in monetary policy. Mr. Hoenig was also concerned that these accommodative policy positions could result in the buildup of future financial imbalances and increase the risks to longer-run macroeconomic and financial stability. It was agreed that the next meeting of the Committee would be held on Tuesday, September 21, 2010. The meeting adjourned at 1:35 p.m. on August 10, 2010. Notation Vote By notation vote completed on July 13, 2010, the Committee unanimously approved the minutes of the FOMC meeting held on June 22-23, 2010.   _____________________________ William B. English Secretary Return to top

2010-08-10

Statement

Information received since the Federal Open Market Committee met in June indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Bank lending has continued to contract. Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be more modest in the near term than had been anticipated. Measures of underlying inflation have trended lower in recent quarters and, with substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve's holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities.1 The Committee will continue to roll over the Federal Reserve's holdings of Treasury securities as they mature. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability. Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh. Voting against the policy was Thomas M. Hoenig, who judges that the economy is recovering modestly, as projected. Accordingly, he believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted and limits the Committee's ability to adjust policy when needed. In addition, given economic and financial conditions, Mr. Hoenig did not believe that keeping constant the size of the Federal Reserve's holdings of longer-term securities at their current level was required to support a return to the Committee's policy objectives.   1. The Open Market Desk will issue a technical note shortly after the statement providing operational details on how it will carry out these transactions. Return to text

2010-07-14

Minute

A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held in the offices of the Board of Governors in Washington, D.C., on Tuesday, June 22, 2010, at 2:00 p.m. and continued on Wednesday, June 23, 2010, at 9:00 a.m. PRESENT: Ben Bernanke, Chairman William C. Dudley, Vice Chairman James Bullard Elizabeth Duke Thomas M. Hoenig Donald L. Kohn Sandra Pianalto Eric Rosengren Daniel K. Tarullo Kevin Warsh Charles L. Evans, Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, Alternate Members of the Federal Open Market Committee Jeffrey M. Lacker, Dennis P. Lockhart, and Janet L. Yellen, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco, respectively Brian F. Madigan, Secretary and Economist Matthew M. Luecke, Assistant Secretary David W. Skidmore, Assistant Secretary Michelle A. Smith, Assistant Secretary Thomas Baxter, Deputy General Counsel Richard M. Ashton, Assistant General Counsel Nathan Sheets, Economist David J. Stockton, Economist Thomas A. Connors, William B. English, Jeff Fuhrer, Steven B. Kamin, Simon Potter, Lawrence Slifman, Christopher J. Waller, and David W. Wilcox, Associate Economists Brian Sack, Manager, System Open Market Account Jennifer J. Johnson, Secretary of the Board, Office of the Secretary, Board of Governors Patrick M. Parkinson, Director, Division of Bank Supervision and Regulation, Board of Governors Robert deV. Frierson,1 Deputy Secretary, Office of the Secretary, Board of Governors Charles S. Struckmeyer, Deputy Staff Director, Office of the Staff Director for Management, Board of Governors James A. Clouse, Deputy Director, Division of Monetary Affairs, Board of Governors Linda Robertson,2 Assistant to the Board, Office of Board Members, Board of Governors Nellie Liang, David Reifschneider, and William Wascher, Senior Associate Directors, Division of Research and Statistics, Board of Governors; William Nelson, Senior Associate Director, Division of Monetary Affairs, Board of Governors Seth B. Carpenter, Associate Director, Division of Monetary Affairs, Board of Governors Christopher J. Erceg, Deputy Associate Director, Division of International Finance, Board of Governors; Michael G. Palumbo and Joyce K. Zickler, Deputy Associate Directors, Division of Research and Statistics, Board of Governors Brian J. Gross, Special Assistant to the Board, Office of Board Members, Board of Governors Fabio M. Natalucci, Assistant Director, Division of Monetary Affairs, Board of Governors David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors Beth Anne Wilson, Section Chief, Division of International Finance, Board of Governors John C. Driscoll and Jennifer E. Roush, Senior Economists, Division of Monetary Affairs, Board of Governors; Andrea L. Kusko, Senior Economist, Division of Research and Statistics, Board of Governors; John W. Schindler, Senior Economist, Division of International Finance, Board of Governors  Penelope A. Beattie, Assistant to the Secretary, Office of the Secretary, Board of Governors  Valerie Hinojosa and Randall A. Williams, Records Management Analysts, Division of Monetary Affairs, Board of Governors  Patrick K. Barron and John F. Moore, First Vice Presidents, Federal Reserve Banks of Atlanta and San Francisco, respectively  Loretta J. Mester, Harvey Rosenblum, and John C. Williams, Executive Vice Presidents, Federal Reserve Banks of Philadelphia, Dallas, and San Francisco, respectively  David Altig, Richard P. Dzina, Arthur Rolnick, and Mark E. Schweitzer, Senior Vice Presidents, Federal Reserve Banks of Atlanta, New York, Minneapolis, and Cleveland, respectively  Daniel Aaronson, Todd E. Clark, and Andreas L. Hornstein, Vice Presidents, Federal Reserve Banks of Chicago, Kansas City, and Richmond, respectively  Joshua L. Frost, Assistant Vice President, Federal Reserve Bank of New York  Developments in Financial Markets and the Federal Reserve's Balance Sheet The Manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets during the period since the Committee met on April 27-28, 2010. He also briefed the Committee on the System's progress in developing tools for managing the supply of reserves, including reverse repurchase agreements and the Term Deposit Facility. In preparation for possible future reserve draining operations, in June the Federal Reserve conducted the first of several small-value auctions to test the Term Deposit Facility. In addition, the Manager reported on System open market operations during the intermeeting period. By unanimous vote, the Committee ratified those transactions. There were no open market operations in foreign currencies for the System's account over the intermeeting period. In his presentation to the Committee, the Manager noted that "fails to deliver" in the mortgage-backed securities (MBS) market had reached very high levels in recent months. Under these conditions, dealers had experienced difficulty in arranging delivery of a small amount--including about $9 billion of securities with 5.5 percent coupons issued by Fannie Mae--of the $1.25 trillion of MBS that the Desk at the Federal Reserve Bank of New York had purchased between January 2009 and March 2010. The Desk had postponed settlement of some of these transactions through the use of dollar rolls. The Manager discussed alternative methods of settling the outstanding transactions and recommended that the Committee authorize the Desk to engage in coupon swap transactions to facilitate the settlement of these purchases. The Manager noted that a coupon swap is a common transaction in the market for MBS in which the two counterparties exchange securities at market prices. By engaging in a coupon swap, the Federal Reserve would effectively sell the scarce securities that it had not yet received and purchase instead securities that are more readily available in the market. After discussing various approaches, meeting participants agreed that coupon swaps were an appropriate method to achieve settlement of outstanding transactions. As background for the Committee's continuing consideration of its portfolio management policies, the Manager gave a presentation on alternative strategies for reinvesting the proceeds from maturing Treasury securities. Under current practice, the Desk reinvests the proceeds of maturing Treasury coupon securities in new Treasury securities that are issued on the date the older securities mature, allocating the investments across the new securities in proportion to the issuance amounts. The Manager presented two alternatives to the status quo. First, the Committee could consider halting all reinvestment of the proceeds of maturing securities. Such a strategy would shrink the size of the Federal Reserve's balance sheet and reduce the quantity of reserve balances in the banking system gradually over time. Second, the Committee could reinvest the proceeds of maturing securities only in new issues of Treasury securities with relatively short maturities--bills only, or bills as well as coupon issues with terms of three years or less. This strategy would maintain the size of the Federal Reserve's balance sheet but would reduce somewhat the average maturity of the portfolio and increase its liquidity. One participant favored halting all reinvestment, and many saw benefits to eventually adopting an approach of reinvesting in bills and shorter-term coupon issues to shift the maturity composition of the portfolio toward the structure that had prevailed prior to the financial crisis. However, the Committee made no change to its reinvestment policy at this meeting. Continuing a discussion from previous meetings, participants again addressed issues regarding asset sales. Participants continued to agree that gradual sales of MBS should be undertaken, at some point, to speed the return to a Treasury-securities-only portfolio. A few participants supported beginning such sales fairly soon; they noted that, given the evident demand in the market for safe, longer-term assets, modest sales of MBS might not put much, if any, upward pressure on long-term interest rates or be disruptive to the functioning of financial markets. However, many participants still saw asset sales as potentially tightening financial conditions to some extent. Most participants continued to judge it appropriate to defer asset sales for some time; several noted the modest weakening in the economic outlook since the Committee's last meeting as an additional reason to do so. A majority of participants continued to anticipate that asset sales would start after the Committee had begun to firm policy by increasing short-term interest rates; such an approach would postpone asset sales until the economic recovery was well established and maintain short-term interest rates as the Committee's key monetary policy tool. A few participants suggested selling MBS and using the proceeds to purchase Treasury securities of comparable duration, arguing that doing so would hasten the move toward a Treasury-securities-only portfolio without tightening financial conditions. Participants agreed that it would be important to maintain flexibility regarding the appropriate timing and pace of asset sales, given the uncertainties associated with the unprecedented size and composition of the Federal Reserve's balance sheet and its effects on financial conditions. Overall, participants emphasized that any decision to engage in asset sales would need to be communicated well in advance of the initiation of such transactions, and that sales should be conducted at a gradual pace and potentially be adjusted in response to developments in economic and financial conditions. Staff Review of the Economic Situation The information reviewed at the June 22-23 meeting suggested that the economic recovery was proceeding at a moderate pace in the second quarter. Businesses continued to increase employment and lengthen workweeks in April and May, but the unemployment rate remained elevated. Industrial production registered strong and widespread gains, and business investment in equipment and software rose rapidly. Consumer spending appeared to have moved up further in April and May. However, housing starts dropped in May, and nonresidential construction remained depressed. Falling energy prices held down headline consumer prices in April and May while core consumer prices edged up. Labor demand continued to firm in recent months. While the change in total nonfarm payroll employment in May was boosted significantly by the hiring of temporary workers for the decennial census, private employment posted only a small increase. This increase, however, followed sizable gains in March and April, and the average workweek of all private-sector employees increased over the March-to-May period. As a result, aggregate hours worked by employees on private nonfarm payrolls rose substantially through May. The unemployment rate moved up in April but dropped back in May to 9.7 percent, its first-quarter average. The labor force participation rate was, on average, higher in recent months than in the first quarter, as rising employment was accompanied by an increasing number of jobseekers. Although the number of workers who were employed part time for economic reasons leveled off in recent months, the proportion of unemployed workers who were jobless for more than 26 weeks continued to move up. Initial claims for unemployment insurance were little changed over the intermeeting period, remaining at a still-elevated level. Industrial production rose at a robust rate in April and May, with production increases broadly based across industries. Firming domestic demand, rising exports, and business inventory restocking appeared to have provided upward impetus to factory production. In April and May, production in high-technology industries again rose strongly, with substantial gains in the output of semiconductors and further solid increases in the production of computers and communications equipment. The production of other types of business equipment continued to rebound, and the output of construction supplies advanced further. Production of light motor vehicles turned up in May; nonetheless, dealers' inventories remained lean. Capacity utilization in manufacturing rose in May to a rate noticeably above the low reached in mid-2009, but it was still substantially below its longer-run average. The rise in consumer spending slowed in recent months after a brisk increase in the first quarter. Although sales of light motor vehicles continued to trend higher, nominal sales of non-auto consumer goods and food services were little changed in April and May. The moderation in spending appeared, on balance, to be aligning the pace of consumption with recent trends in income, wealth, and consumer sentiment. Real disposable personal income moved up at a solid rate in March and April, reflecting increases in employment and hours worked as well as slightly higher real wages, but home values declined in recent months and equity prices moved down since the April meeting. Measures of consumer sentiment improved in May and early June but were still at relatively low levels. The anticipated expiration of the homebuyer tax credit appeared to have pulled home sales forward, boosting their level in recent months. Sales of existing single-family homes rose strongly in April, and, although they moved down in May, these sales were still above their level earlier in the year. Purchases of new single-family homes also jumped in April, but then fell steeply in May. On net, the upswing in the volume of real estate transactions in recent months was likely to boost the brokers' commissions component of residential investment in the second quarter. However, starts of new single-family homes, which had trended higher in the first four months of the year, declined sharply in May. In addition, the number of permits for new homes, which tends to lead starts, fell for a second month in May. House prices declined somewhat in recent months, reversing some of the modest increases that occurred in the spring and summer of 2009. After changing little on net during the preceding year, interest rates for 30-year fixed-rate conforming mortgages moved lower in May and June. Real spending on equipment and software increased further early in the second quarter. Business outlays for computing equipment and software continued to rise at a brisk pace through April, and shipments of aircraft to domestic carriers rebounded. Orders and shipments of nondefense capital goods excluding transportation and high-tech equipment stayed on a noticeable uptrend, on net, in March and April, with the increases broadly based by type of equipment. The recovery in equipment and software spending was consistent with the relatively strong gains in production in recent months, improved financial conditions over the first part of the year, and the positive readings from surveys on business conditions and earnings reports for producers of capital goods. Business outlays for nonresidential construction appeared to be contracting further, on balance, in March and April, although the rate of decline seemed to be moderating. Outlays for new power plants and for manufacturing facilities firmed, and investment in drilling and mining structures continued to rise strongly. However, spending on office and commercial structures was still falling steeply through April, with the weakness likely related to high vacancy rates, falling property prices, and the light volume of sales. Businesses appeared to have begun to restock their inventories. Real nonfarm inventory investment turned positive in the first quarter, and data for April pointed to further modest accumulation. Ratios of inventories to sales for most industries looked to be within comfortable ranges. Consumer price inflation remained low in April and May. The core consumer price index rose only slightly over the period, and the year-over-year change in the index was lower than earlier this year. Core goods prices continued to decline, on net, and prices of non-energy services remained soft. The headline consumer price index edged down in both months, as the drop in the price of crude oil since April led consumer energy prices to retrace a portion of the run-up that occurred during the nine months ending in January. At earlier stages of processing, producer prices of core intermediate materials rose moderately in May after five months of large increases. Inflation compensation based on Treasury inflation-protected securities decreased recently in response to low readings on inflation and falling oil prices. Survey measures of both short- and long-term inflation expectations remained relatively stable. Unit labor costs continued to be restrained by weakness in hourly compensation and further gains in productivity. Revised estimates of labor compensation indicated that hourly compensation in the nonfarm business sector was about flat, on net, during the fourth quarter of 2009 and the first quarter of 2010. The employment cost index showed a moderate rise over the period, boosted by a sizable increase in benefit costs in the first quarter. The year-over-year increase in average hourly earnings of all employees was also moderate through May. Output per hour in the nonfarm business sector, which rose rapidly in 2009, posted a more moderate but still-solid gain in the first quarter of 2010. The U.S. international trade deficit widened slightly in April, as nominal exports fell a bit more than nominal imports. The April declines in both exports and imports followed robust increases in March. The April fall in exports reflected declines in exports of consumer goods, primarily due to a drop in pharmaceuticals, and in agricultural goods. Exports of industrial supplies moved up while exports of capital goods were flat after increasing strongly in March. Imports in April were pulled down by lower imports of consumer goods, which more than offset sharply higher imports of capital goods, particularly computing equipment. Imports of automotive products and non-oil industrial supplies declined slightly, and imports of petroleum products were flat following a large increase in March. Incoming data suggested that economic activity abroad continued to expand at a strong pace in the first half of the year. Among the advanced foreign economies, growth of real gross domestic product (GDP) in the first quarter was particularly strong in Canada and Japan, and recent indicators for those countries pointed to continued solid increases in the second quarter. In contrast, the rise in economic activity in the euro area was subdued, as favorable readings for the manufacturing sector were counterbalanced by weakness in domestic demand. Since the time of the April meeting of the Federal Open Market Committee (FOMC), concerns about the fiscal situation of several euro-area countries intensified sharply. In response, European authorities announced a number of policy measures, including acceleration of fiscal consolidation plans in some countries, finalization of an International Monetary Fund (IMF) and European Union (EU) assistance package for Greece, and the introduction of a broader €500 billion financial assistance program that could be complemented by bilateral IMF lending. The European Central Bank (ECB) also announced further measures to improve liquidity conditions in impaired markets, including a program to purchase sovereign and private debt. Economic activity in emerging market economies continued to expand briskly in the first half of this year. Growth of economic activity was particularly robust in emerging Asia, driven in part by strong increases in industrial production and exports associated with solid gains in final demand as well as the turn in the inventory cycle. The rise of real GDP in Latin America appeared to have stalled in the first quarter, but this development reflected a contraction in Mexico that more-favorable monthly indicators suggested should prove temporary. In contrast, the increase in Brazilian real GDP was very strong. Consumer price inflation in the foreign economies in aggregate was buoyed by higher food and energy prices in the first quarter, while core inflation generally remained subdued. More recent information suggested some moderation in foreign inflation in the second quarter. Staff Review of the Financial Situation The FOMC's decision at its April meeting to maintain the 0 to 1/4 percent target range for the federal funds rate and the wording of the accompanying statement were largely in line with expectations and prompted little market reaction. Economic data releases were mixed, on balance, over the intermeeting period, but market participants were especially attentive to incoming information on the labor market--most notably, the private payroll figures in the employment report for May, which were considerably weaker than investors expected. Those data, combined with heightened concerns about the global economic outlook stemming in part from Europe's sovereign debt problems, contributed to a downward revision in the expected path of policy implied by money market futures rates. In the market for Treasury coupon securities, 2- and 10-year nominal yields fell considerably over the intermeeting period. Market participants pointed to flight-to-quality flows and greater concern about the economic outlook as factors boosting the demand for Treasury securities. The drop in Treasury yields was accompanied by a small widening of swap spreads. Conditions in short-term funding markets deteriorated somewhat, particularly for European financial institutions. Spreads of the term London interbank offered rate, or Libor, over rates on overnight index swaps widened noticeably, with the availability of funding at maturities longer than one week reportedly quite limited. Market participants also reduced holdings of commercial paper sponsored by entities thought to have exposures to peripheral European financial institutions and governments. Even so, spreads of high-grade unsecured financial commercial paper to nonfinancial commercial paper widened only modestly over the intermeeting period. In secured funding markets, spreads on asset-backed commercial paper also widened modestly, while rates on repurchase agreements involving Treasury and agency collateral changed little. In the inaugural Senior Credit Officer Opinion Survey on Dealer Financing Terms, which was conducted by the Federal Reserve between May 24 and June 4, dealers generally reported that the terms on which they provided credit remained tight relative to those at the end of 2006. However, they noted some loosening of terms for both securities financing and over-the-counter derivatives transactions, on net, over the previous three months for certain classes of clients--including hedge funds, institutional investors, and nonfinancial corporations--and intensified efforts by those clients to negotiate more-favorable terms. At the same time, they reported a pickup in demand for financing across several collateral types over the past three months. Broad U.S. stock price indexes fell over the intermeeting period, in part reflecting deepening concerns about the European fiscal situation and its potential for adverse spillovers to global economic growth. Option-implied volatility on the S&P 500 index spiked in mid-May, to more than double its value at the time of the April FOMC meeting, but largely reversed its run-up by the time of the June meeting. The spread between the staff's estimate of the expected real return on equities over the next 10 years and an estimate of the expected real return on a 10-year Treasury note--a measure of the equity risk premium--increased from its already elevated level. Investors' attitudes toward financial institutions deteriorated somewhat, as the equity of financial firms underperformed the broader market amid uncertainty about the implications of developments in Europe and the potential effects of financial regulatory reform. Yields on investment- and speculative-grade corporate bonds moved higher over the intermeeting period, and high-yield bond mutual funds recorded substantial net outflows. Spreads on corporate bonds widened, although they remained within the range prevailing since last summer. Secondary-market bid prices on syndicated leveraged loans fell, while bid-asked spreads in that market widened. Net debt financing by nonfinancial corporations increased in April and May relative to its pace in the first quarter. Gross bond issuance by investment-grade nonfinancial corporations in the United States remained solid, on average, over those two months; nonfinancial commercial paper outstanding increased as well. High-yield corporate bond issuance in the United States briefly paused in May, reflecting the market's pullback from risky assets, although speculative-grade U.S. firms continued to issue bonds abroad and a few placed issues domestically in the first half of June. Gross equity issuance fell a bit, on net, in April and May, likely due in part to recent declines in equity prices and elevated market volatility. Measures of the credit quality of nonfinancial firms generally continued to improve, and first-quarter profits for firms in the S&P 500 jumped substantially, primarily reflecting an upturn in financial sector profits from quite depressed levels. The outlook in commercial real estate markets stayed weak; prices of commercial properties fell a bit further in the first quarter, and the volume of commercial property sales remained light. The delinquency rate for securitized commercial mortgages continued to climb in May, and indexes of prices of credit default swaps on commercial mortgages declined, on net, over the intermeeting period. Consumer credit contracted again in recent months, as revolving credit continued on a steep downtrend. Issuance of consumer credit asset-backed securities (ABS) increased in May, although the pace was still well below that observed before the onset of the financial crisis. Credit card ABS issuance remained subdued, partly reflecting regulatory changes that made financing credit card receivables via securitization less desirable. In primary markets, spreads of credit card interest rates over those on Treasury securities remained extremely high in April, while interest rate spreads on auto loans stayed near their average level of the past decade. Consumer credit quality improved further, with delinquency rates on credit cards and auto loans moving down a bit in April. Bank credit declined, on average, in April and May at about the same pace as in the first quarter. Commercial and industrial loans, after dropping rapidly in April, decreased at a slower pace in May. While commercial real estate and home equity loans fell at a slightly faster rate than in recent quarters, the contraction in closed-end residential loans abated, partly because of a reduced pace of sales to Fannie Mae and Freddie Mac. Consumer loans declined again, on average, in April and May. The amount of Treasury and agency securities held by large domestic banks and foreign-related institutions declined in May, contributing to a sizable drop in banks' securities holdings. On a seasonally adjusted basis, M2 contracted in April but surged in May, with much of the month-to-month variation apparently associated with the effects of federal tax payments and refunds. Averaging across the two months, M2 expanded moderately after having been about unchanged in the first quarter; liquid deposits accounted for most of the net change. The threat to global economic growth and financial stability posed by the fiscal situation in some European nations sparked widespread flight-to-quality flows over most of the intermeeting period. This retreat led to a broad appreciation of the dollar as well as declines in equity prices abroad and in yields on benchmark sovereign bonds. However, investor sentiment improved near the end of the period, leading to a partial reversal in some of these movements, despite Moody's downgrade of Greece to below-investment-grade status in mid-June. On net, the dollar ended the intermeeting period up, most headline equity indexes fell, and benchmark government bond yields declined. Strains in euro-area bank funding markets reemerged during the period. In response, the ECB announced some changes to its liquidity operations that would provide greater market access to term funding in euros.3 Difficulties also appeared in corporate debt markets as both nonfinancial and financial corporate debt issuance dropped substantially in May. In addition, pressures in dollar funding markets reappeared for foreign financial institutions, especially those thought to have significant exposure to Greece and other peripheral euro-area countries. To help contain these pressures and to prevent their spread to other institutions and regions, the Federal Reserve reestablished dollar liquidity swap arrangements with the ECB, the Bank of England, the Bank of Japan, the Bank of Canada, and the Swiss National Bank. Yields on the sovereign obligations of peripheral European countries declined noticeably following a May 10 announcement of a framework established by the EU for providing financial aid to euro-area governments and of the ECB's intention to purchase euro-area sovereign debt. However, yields remained high even after these announcements and moved up subsequently, notwithstanding the ECB's purchases of government debt. Amid a weakening outlook for economic growth in Europe, central banks in several emerging European economies began to decrease policy rates. By contrast, brighter economic prospects in Canada and China prompted the Bank of Canada to raise its target for the overnight rate to 50 basis points at its June meeting and Chinese authorities to raise banks' reserve requirement further in May. In addition, the People's Bank of China announced late in the period that it would allow the renminbi to move more flexibly, and the currency appreciated slightly immediately following the announcement. Staff Economic Outlook In the economic forecast prepared for the June FOMC meeting, the staff continued to anticipate a moderate recovery in economic activity through 2011, supported by accommodative monetary policy, an attenuation of financial stress, and strengthening consumer and business confidence. While the recent data on production and spending were broadly in line with the staff's expectations, the pace of the expansion over the next year and a half was expected to be somewhat slower than previously predicted. The intensifying concerns among investors about the implications of the fiscal difficulties faced by some European countries contributed to an increase in the foreign exchange value of the dollar and a drop in equity prices, which seemed likely to damp somewhat the expansion of domestic demand. The implications of these less-favorable factors for U.S. economic activity appeared likely to be only partly offset by lower interest rates on Treasury securities, other highly rated securities, and mortgages, as well as by a lower price for crude oil. The staff still expected that the pace of economic activity through 2011 would be sufficient to reduce the existing margins of economic slack, although the anticipated decline in the unemployment rate was somewhat slower than in the previous projection. The staff's forecasts for headline and core inflation were also reduced slightly. The changes were a response to the lower prices of oil and other commodities, the appreciation of the dollar, and the greater amount of economic slack in the forecast. Despite these developments, inflation expectations had remained stable, likely limiting movements in inflation. On balance, core inflation was expected to continue at a subdued rate over the projection period. As in earlier forecasts, headline inflation was projected to move into line with the core rate by 2011. Participants' Views of Current Conditions and the Economic Outlook In conjunction with this FOMC meeting, all meeting participants--the five members of the Board of Governors and the presidents of the 12 Federal Reserve Banks--provided projections of economic growth, the unemployment rate, and consumer price inflation for each year from 2010 through 2012 and over a longer horizon. Longer-run projections represent each participant's assessment of the rate to which each variable would be expected to converge over time under appropriate monetary policy and in the absence of further shocks. Participants' forecasts through 2012 and over the longer run are described in the Summary of Economic Projections, which is attached as an addendum to these minutes. In their discussion of the economic situation and outlook, meeting participants generally saw the incoming data and information received from business contacts as consistent with a continued, moderate recovery in economic activity. Participants noted that the labor market was improving gradually, household spending was increasing, and business spending on equipment and software had risen significantly. With private final demand having strengthened, inventory adjustments and fiscal stimulus were no longer the main factors supporting economic expansion. In light of stable inflation expectations and incoming data indicating low rates of inflation, policymakers continued to anticipate that both overall and core inflation would remain subdued through 2012. However, financial markets were generally seen as recently having become less supportive of economic growth, largely reflecting international spillovers from European fiscal strains. In part as a result of the change in financial conditions, most participants revised down slightly their outlook for economic growth, and about one-half of the participants judged the balance of risks to growth as having moved to the downside. Most participants continued to see the risks to inflation as balanced. A number of participants expressed the view that, over the next several years, both employment and inflation would likely be below levels they consider to be consistent with their dual mandate, but they anticipated that, with appropriate monetary policy, both would rise over time to levels consistent with the Federal Reserve's objectives. Financial markets had become somewhat less supportive of economic growth since the April meeting, with the developments in Europe cited as a leading cause of greater global financial market tensions. Risk spreads for many corporate borrowers had widened noticeably, equity prices had fallen appreciably, and the dollar had risen in value against a broad basket of other currencies. Participants saw these changes as likely to weigh to some degree on household and business spending over coming quarters. Participants also noted ongoing difficulties in financing commercial real estate. Nonetheless, reports suggested that more-creditworthy business borrowers were still able to obtain funding in the open markets on fairly attractive terms, and a couple of participants noted that credit from the banking sector, which had been contracting for some time, was showing some tentative signs of stabilizing. Moreover, several participants observed that the decline in yields on Treasury securities resulting from the global flight to quality was positive for the domestic economy; in particular, the associated decline in mortgage rates was seen as potentially helpful in supporting the housing sector. Supporting the view of a continued recovery, incoming data and anecdotal reports pointed to strength in a number of business sectors, particularly manufacturing and transportation. Policymakers noted that firms' investment in equipment and software had advanced rapidly of late, and they anticipated that such spending would continue to rise, though perhaps at a somewhat slower pace. Business contacts suggested that investment spending had been supported by the replacement and upgrading of existing capital, making up for some spending that had been postponed in the downturn, and this component of investment demand was seen as unlikely to remain robust. In addition, inventory accumulation, which had been a significant contributor to recent gains in production, appeared likely to provide less impetus to growth in coming quarters. Participants also noted that several uncertainties, including those related to legislative changes and to developments in global financial markets, were generating a heightened level of caution that could lead some firms to delay hiring and planned investment outlays. Participants commented that household spending continued to advance, with notable increases in auto sales and expenditures on other durable goods. Going forward, consumption spending was expected to continue to post moderate gains, with the effects of income growth and improved confidence as the economy recovers more than offsetting the effects of lower stock prices and housing wealth. However, continued labor market weakness could weigh on consumer sentiment, and households were still repairing their balance sheets; both factors could restrain consumer spending going forward. Although readings from the housing sector had been strong through mid-spring, participants noted that the strength likely reflected the effects of the temporary tax credits for homebuyers. Indeed, data for the most recent month suggested that, with the expiration of those provisions, home sales and starts had stepped down noticeably and could remain weak in the near term; with lower demand and a continuing supply of foreclosed houses coming to market, participants judged that house prices were likely to remain flat or decline somewhat further in the near term. Meeting participants interpreted the data on the labor market as consistent with their outlook for gradual recovery. Employers were adding hours to the workweek and hiring temporary workers, suggesting a pickup in labor demand; however, the most recent data on employment had been disappointing, and new claims for unemployment insurance remained elevated. Reportedly, employers were still cautious about adding to payrolls, given uncertainties about the outlook for the economy and government policies. Participants expected the pace of hiring to remain low for some time. Indeed, the unemployment rate was generally expected to remain noticeably above its long-run sustainable level for several years, and participants expressed concern about the extended duration of unemployment spells for a large number of workers. Participants also noted a risk that continued rapid growth in productivity, though clearly beneficial in the longer term, could in the near term act to moderate growth in the demand for labor and thus slow the pace at which the unemployment rate normalizes. A broad set of indicators suggested that underlying inflation remained subdued and was, on net, trending lower. The latest readings on core inflation--which excludes the relatively volatile prices of food and energy--had slowed, and other measures of the underlying trajectory of inflation, such as median and trimmed-mean measures, also had moved down this year. Crude oil prices declined somewhat over the intermeeting period, a factor that was likely to damp headline inflation at the consumer level in coming months. Other commodity prices were moderating, and nominal wages appeared to be rising only slowly. Some participants indicated that they viewed the substantial slack in labor and resource markets as likely to reduce inflation. The financial strains in Europe had led to an increase in the foreign exchange value of the dollar, and the resulting downward pressure on import prices also was expected to weigh on consumer prices for a time. However, inflation expectations were seen by most participants as well anchored, which would tend to curb any tendency for actual inflation to decline. On balance, meeting participants revised down modestly their outlook for inflation over the next couple of years; they generally expected inflation to be quite low in the near term and to trend slightly higher over time. Some participants judged the risks to the outlook for inflation as tilted to the downside, particularly in the near term, in light of the large amount of resource slack already prevailing in the economy, the significant downside risks to the outlook for real activity, and the possibility that inflation expectations could begin to decline in response to low actual inflation. A few participants cited some risk of deflation. Other participants, however, thought that inflation was unlikely to fall appreciably further given the stability of inflation expectations in recent years and very accommodative monetary policy. Over the medium term, participants saw both upside and downside risks to inflation. Several participants noted that a continuation of lower-than-expected inflation and high unemployment could eventually lead to a downward movement in inflation expectations that would reinforce disinflationary pressures. By contrast, a few participants noted the possibility that a potentially unsustainable fiscal position and the size of the Federal Reserve's balance sheet could boost inflation expectations and actual inflation over time. Committee Policy Action In their discussion of monetary policy for the period ahead, members agreed that it would be appropriate to maintain the target range of 0 to 1/4 percent for the federal funds rate. The economic outlook had softened somewhat and a number of members saw the risks to the outlook as having shifted to the downside. Nonetheless, all saw the economic expansion as likely to be strong enough to continue raising resource utilization, albeit more slowly than they had previously anticipated. In addition, they saw inflation as likely to stabilize near recent low readings in coming quarters and then gradually rise toward more desirable levels. In sum, the changes to the outlook were viewed as relatively modest and as not warranting policy accommodation beyond that already in place. However, members noted that in addition to continuing to develop and test instruments to exit from the period of unusually accommodative monetary policy, the Committee would need to consider whether further policy stimulus might become appropriate if the outlook were to worsen appreciably. Given the slightly softer cast of recent data and the shift to less accommodative financial conditions, members agreed that some changes to the statement's characterization of the economic and financial situation were necessary. Nearly all members judged that it was appropriate to reiterate the expectation that economic conditions--including low levels of resource utilization, subdued inflation trends, and stable inflation expectations--were likely to warrant exceptionally low levels of the federal funds rate for an extended period. One member, however, believed that continuing to communicate an expectation in the Committee's statement that the federal funds rate would remain at an exceptionally low level for an extended period would create conditions that could lead to macroeconomic and financial imbalances. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive:  "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability." The vote encompassed approval of the statement below to be released at 2:15 p.m.:  "Information received since the Federal Open Market Committee met in April suggests that the economic recovery is proceeding and that the labor market is improving gradually. Household spending is increasing but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad. Bank lending has continued to contract in recent months. Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be moderate for a time. Prices of energy and other commodities have declined somewhat in recent months, and underlying inflation has trended lower. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability." Voting for this action: Ben Bernanke, William C. Dudley, James Bullard, Elizabeth Duke, Donald L. Kohn, Sandra Pianalto, Eric Rosengren, Daniel K. Tarullo, and Kevin Warsh. Voting against this action: Thomas M. Hoenig. Mr. Hoenig dissented because he believed that, as the economy completed its first year of modest recovery, it was no longer advisable to indicate that economic and financial conditions were likely to warrant "exceptionally low levels of the federal funds rate for an extended period." Although risks to the forecast remained, Mr. Hoenig was concerned that communicating such an expectation would limit the Committee's flexibility to begin raising rates modestly in a timely fashion and could result in a buildup of future financial imbalances and increase the risks to longer-run macroeconomic and financial stability. By unanimous vote, the Committee selected William B. English to serve as Secretary and Economist, and James A. Clouse to serve as Associate Economist, effective July 23, 2010, until the selection of their successors at the first regularly scheduled meeting of the Committee in 2011. It was agreed that the next meeting of the Committee would be held on Tuesday, August 10, 2010. The meeting adjourned at 12:10 p.m. on June 23, 2010. Conference Call On May 9, 2010, the Committee met by conference call to discuss developments in global financial markets and possible policy responses. Over the previous several months, market concerns about the ability of Greece and some other euro-area countries to contain their sizable budget deficits and finance their debt had increased. By early May, financial strains had intensified, reflecting investors' uncertainty about whether fiscally stronger euro-area governments would provide financial support to the weakest members, the extent of the drag on euro-area economies that could result from efforts at fiscal consolidation, and the degree of exposure of major European banks and financial institutions to vulnerable countries. Conditions in short-term funding markets in Europe had also deteriorated, and global financial markets more generally had been volatile and less supportive of economic growth. The Chairman indicated that European authorities were considering a number of measures to promote fiscal sustainability and to provide increased liquidity and support to money markets and markets for European sovereign debt. In connection with the possible implementation of these measures, some major central banks had requested that dollar liquidity swap lines with the Federal Reserve be reestablished. These swap lines would enhance the ability of these central banks to provide support for dollar funding markets in their jurisdictions. The terms and conditions of the swap lines would generally be similar to those in place prior to their expiration earlier in the year. The Committee discussed considerations surrounding the possible reestablishment of dollar liquidity swap lines. Participants agreed that such arrangements could be helpful in limiting the strains in dollar funding markets and the adverse implications of recent developments for the U.S. economy. Participants observed that, in current circumstances, the dollar swap lines should be made available to a smaller number of major foreign central banks than previously. In order to promote the transparency of these arrangements, participants agreed that it would be appropriate for the Federal Reserve to publish the swap contracts and to release on a weekly basis the amounts of draws under the swap lines by central bank counterparty. It was recognized that the Committee would need to consider the implications of swap lines for bank reserves and overall management of the Federal Reserve's balance sheet. Participants noted the importance of appropriate consultation with U.S. government officials and emphasized that a reestablishment of the lines should be contingent on strong and effective actions by authorities in Europe to address fiscal sustainability and support financial markets. At the conclusion of the discussion, the Committee voted unanimously to approve the following resolution:  "The Committee authorizes the Chairman to agree to establish swap lines with the European Central Bank, the Bank of England, the Swiss National Bank, the Bank of Japan, and the Bank of Canada, as discussed by the Committee today." Secretary's note: Later on May 9, 2010, the Federal Reserve, in coordination with the Bank of Canada, the Bank of England, the European Central Bank (ECB), and the Swiss National Bank, announced that U.S. dollar liquidity swap facilities had been reestablished with those central banks. The arrangements with the Bank of England, the ECB, and the Swiss National Bank provide these central banks with the capacity to conduct tenders of U.S. dollars in their local markets at fixed rates for full allotment, similar to arrangements that had been in place previously. The arrangement with the Bank of Canada would support drawings of up to $30 billion, as was the case previously. On May 10, the Federal Reserve and the Bank of Japan (BOJ) announced that a temporary U.S. dollar liquidity swap arrangement had been established that would provide the BOJ with the capacity to conduct tenders of U.S. dollars at fixed rates for full allotment. Notation Vote By notation vote completed on May 17, 2010, the Committee unanimously approved the minutes of the FOMC meeting held on April 27–28, 2010.   _____________________________ Brian F. Madigan Secretary 1. Attended Tuesday's session only. Return to text 2. Attended Wednesday's session only. Return to text 3. The ECB reinstituted a six-month lending operation and switched its three-month lending operations from fixed-quantity auctions to full-allotment offerings at a fixed rate of 1 percent. Return to text Return to top

2010-06-23

Statement

Information received since the Federal Open Market Committee met in April suggests that the economic recovery is proceeding and that the labor market is improving gradually. Household spending is increasing but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad. Bank lending has continued to contract in recent months. Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be moderate for a time. Prices of energy and other commodities have declined somewhat in recent months, and underlying inflation has trended lower. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability. Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh. Voting against the policy action was Thomas M. Hoenig, who believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to a build-up of future imbalances and increase risks to longer-run macroeconomic and financial stability, while limiting the Committee’s flexibility to begin raising rates modestly.

N/A

Minute

A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held in the offices of the Board of Governors in Washington, D.C., on Tuesday, June 22, 2010, at 2:00 p.m. and continued on Wednesday, June 23, 2010, at 9:00 a.m. PRESENT: Ben Bernanke, Chairman William C. Dudley, Vice Chairman James Bullard Elizabeth Duke Thomas M. Hoenig Donald L. Kohn Sandra Pianalto Eric Rosengren Daniel K. Tarullo Kevin Warsh Charles L. Evans, Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, Alternate Members of the Federal Open Market Committee Jeffrey M. Lacker, Dennis P. Lockhart, and Janet L. Yellen, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco, respectively Brian F. Madigan, Secretary and Economist Matthew M. Luecke, Assistant Secretary David W. Skidmore, Assistant Secretary Michelle A. Smith, Assistant Secretary Thomas Baxter, Deputy General Counsel Richard M. Ashton, Assistant General Counsel Nathan Sheets, Economist David J. Stockton, Economist Thomas A. Connors, William B. English, Jeff Fuhrer, Steven B. Kamin, Simon Potter, Lawrence Slifman, Christopher J. Waller, and David W. Wilcox, Associate Economists Brian Sack, Manager, System Open Market Account Jennifer J. Johnson, Secretary of the Board, Office of the Secretary, Board of Governors Patrick M. Parkinson, Director, Division of Bank Supervision and Regulation, Board of Governors Robert deV. Frierson,1 Deputy Secretary, Office of the Secretary, Board of Governors Charles S. Struckmeyer, Deputy Staff Director, Office of the Staff Director for Management, Board of Governors James A. Clouse, Deputy Director, Division of Monetary Affairs, Board of Governors Linda Robertson,2 Assistant to the Board, Office of Board Members, Board of Governors Nellie Liang, David Reifschneider, and William Wascher, Senior Associate Directors, Division of Research and Statistics, Board of Governors; William Nelson, Senior Associate Director, Division of Monetary Affairs, Board of Governors Seth B. Carpenter, Associate Director, Division of Monetary Affairs, Board of Governors Christopher J. Erceg, Deputy Associate Director, Division of International Finance, Board of Governors; Michael G. Palumbo and Joyce K. Zickler, Deputy Associate Directors, Division of Research and Statistics, Board of Governors Brian J. Gross, Special Assistant to the Board, Office of Board Members, Board of Governors Fabio M. Natalucci, Assistant Director, Division of Monetary Affairs, Board of Governors David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors Beth Anne Wilson, Section Chief, Division of International Finance, Board of Governors John C. Driscoll and Jennifer E. Roush, Senior Economists, Division of Monetary Affairs, Board of Governors; Andrea L. Kusko, Senior Economist, Division of Research and Statistics, Board of Governors; John W. Schindler, Senior Economist, Division of International Finance, Board of Governors  Penelope A. Beattie, Assistant to the Secretary, Office of the Secretary, Board of Governors  Valerie Hinojosa and Randall A. Williams, Records Management Analysts, Division of Monetary Affairs, Board of Governors  Patrick K. Barron and John F. Moore, First Vice Presidents, Federal Reserve Banks of Atlanta and San Francisco, respectively  Loretta J. Mester, Harvey Rosenblum, and John C. Williams, Executive Vice Presidents, Federal Reserve Banks of Philadelphia, Dallas, and San Francisco, respectively  David Altig, Richard P. Dzina, Arthur Rolnick, and Mark E. Schweitzer, Senior Vice Presidents, Federal Reserve Banks of Atlanta, New York, Minneapolis, and Cleveland, respectively  Daniel Aaronson, Todd E. Clark, and Andreas L. Hornstein, Vice Presidents, Federal Reserve Banks of Chicago, Kansas City, and Richmond, respectively  Joshua L. Frost, Assistant Vice President, Federal Reserve Bank of New York  Developments in Financial Markets and the Federal Reserve's Balance Sheet The Manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets during the period since the Committee met on April 27-28, 2010. He also briefed the Committee on the System's progress in developing tools for managing the supply of reserves, including reverse repurchase agreements and the Term Deposit Facility. In preparation for possible future reserve draining operations, in June the Federal Reserve conducted the first of several small-value auctions to test the Term Deposit Facility. In addition, the Manager reported on System open market operations during the intermeeting period. By unanimous vote, the Committee ratified those transactions. There were no open market operations in foreign currencies for the System's account over the intermeeting period. In his presentation to the Committee, the Manager noted that "fails to deliver" in the mortgage-backed securities (MBS) market had reached very high levels in recent months. Under these conditions, dealers had experienced difficulty in arranging delivery of a small amount--including about $9 billion of securities with 5.5 percent coupons issued by Fannie Mae--of the $1.25 trillion of MBS that the Desk at the Federal Reserve Bank of New York had purchased between January 2009 and March 2010. The Desk had postponed settlement of some of these transactions through the use of dollar rolls. The Manager discussed alternative methods of settling the outstanding transactions and recommended that the Committee authorize the Desk to engage in coupon swap transactions to facilitate the settlement of these purchases. The Manager noted that a coupon swap is a common transaction in the market for MBS in which the two counterparties exchange securities at market prices. By engaging in a coupon swap, the Federal Reserve would effectively sell the scarce securities that it had not yet received and purchase instead securities that are more readily available in the market. After discussing various approaches, meeting participants agreed that coupon swaps were an appropriate method to achieve settlement of outstanding transactions. As background for the Committee's continuing consideration of its portfolio management policies, the Manager gave a presentation on alternative strategies for reinvesting the proceeds from maturing Treasury securities. Under current practice, the Desk reinvests the proceeds of maturing Treasury coupon securities in new Treasury securities that are issued on the date the older securities mature, allocating the investments across the new securities in proportion to the issuance amounts. The Manager presented two alternatives to the status quo. First, the Committee could consider halting all reinvestment of the proceeds of maturing securities. Such a strategy would shrink the size of the Federal Reserve's balance sheet and reduce the quantity of reserve balances in the banking system gradually over time. Second, the Committee could reinvest the proceeds of maturing securities only in new issues of Treasury securities with relatively short maturities--bills only, or bills as well as coupon issues with terms of three years or less. This strategy would maintain the size of the Federal Reserve's balance sheet but would reduce somewhat the average maturity of the portfolio and increase its liquidity. One participant favored halting all reinvestment, and many saw benefits to eventually adopting an approach of reinvesting in bills and shorter-term coupon issues to shift the maturity composition of the portfolio toward the structure that had prevailed prior to the financial crisis. However, the Committee made no change to its reinvestment policy at this meeting. Continuing a discussion from previous meetings, participants again addressed issues regarding asset sales. Participants continued to agree that gradual sales of MBS should be undertaken, at some point, to speed the return to a Treasury-securities-only portfolio. A few participants supported beginning such sales fairly soon; they noted that, given the evident demand in the market for safe, longer-term assets, modest sales of MBS might not put much, if any, upward pressure on long-term interest rates or be disruptive to the functioning of financial markets. However, many participants still saw asset sales as potentially tightening financial conditions to some extent. Most participants continued to judge it appropriate to defer asset sales for some time; several noted the modest weakening in the economic outlook since the Committee's last meeting as an additional reason to do so. A majority of participants continued to anticipate that asset sales would start after the Committee had begun to firm policy by increasing short-term interest rates; such an approach would postpone asset sales until the economic recovery was well established and maintain short-term interest rates as the Committee's key monetary policy tool. A few participants suggested selling MBS and using the proceeds to purchase Treasury securities of comparable duration, arguing that doing so would hasten the move toward a Treasury-securities-only portfolio without tightening financial conditions. Participants agreed that it would be important to maintain flexibility regarding the appropriate timing and pace of asset sales, given the uncertainties associated with the unprecedented size and composition of the Federal Reserve's balance sheet and its effects on financial conditions. Overall, participants emphasized that any decision to engage in asset sales would need to be communicated well in advance of the initiation of such transactions, and that sales should be conducted at a gradual pace and potentially be adjusted in response to developments in economic and financial conditions. Staff Review of the Economic Situation The information reviewed at the June 22-23 meeting suggested that the economic recovery was proceeding at a moderate pace in the second quarter. Businesses continued to increase employment and lengthen workweeks in April and May, but the unemployment rate remained elevated. Industrial production registered strong and widespread gains, and business investment in equipment and software rose rapidly. Consumer spending appeared to have moved up further in April and May. However, housing starts dropped in May, and nonresidential construction remained depressed. Falling energy prices held down headline consumer prices in April and May while core consumer prices edged up. Labor demand continued to firm in recent months. While the change in total nonfarm payroll employment in May was boosted significantly by the hiring of temporary workers for the decennial census, private employment posted only a small increase. This increase, however, followed sizable gains in March and April, and the average workweek of all private-sector employees increased over the March-to-May period. As a result, aggregate hours worked by employees on private nonfarm payrolls rose substantially through May. The unemployment rate moved up in April but dropped back in May to 9.7 percent, its first-quarter average. The labor force participation rate was, on average, higher in recent months than in the first quarter, as rising employment was accompanied by an increasing number of jobseekers. Although the number of workers who were employed part time for economic reasons leveled off in recent months, the proportion of unemployed workers who were jobless for more than 26 weeks continued to move up. Initial claims for unemployment insurance were little changed over the intermeeting period, remaining at a still-elevated level. Industrial production rose at a robust rate in April and May, with production increases broadly based across industries. Firming domestic demand, rising exports, and business inventory restocking appeared to have provided upward impetus to factory production. In April and May, production in high-technology industries again rose strongly, with substantial gains in the output of semiconductors and further solid increases in the production of computers and communications equipment. The production of other types of business equipment continued to rebound, and the output of construction supplies advanced further. Production of light motor vehicles turned up in May; nonetheless, dealers' inventories remained lean. Capacity utilization in manufacturing rose in May to a rate noticeably above the low reached in mid-2009, but it was still substantially below its longer-run average. The rise in consumer spending slowed in recent months after a brisk increase in the first quarter. Although sales of light motor vehicles continued to trend higher, nominal sales of non-auto consumer goods and food services were little changed in April and May. The moderation in spending appeared, on balance, to be aligning the pace of consumption with recent trends in income, wealth, and consumer sentiment. Real disposable personal income moved up at a solid rate in March and April, reflecting increases in employment and hours worked as well as slightly higher real wages, but home values declined in recent months and equity prices moved down since the April meeting. Measures of consumer sentiment improved in May and early June but were still at relatively low levels. The anticipated expiration of the homebuyer tax credit appeared to have pulled home sales forward, boosting their level in recent months. Sales of existing single-family homes rose strongly in April, and, although they moved down in May, these sales were still above their level earlier in the year. Purchases of new single-family homes also jumped in April, but then fell steeply in May. On net, the upswing in the volume of real estate transactions in recent months was likely to boost the brokers' commissions component of residential investment in the second quarter. However, starts of new single-family homes, which had trended higher in the first four months of the year, declined sharply in May. In addition, the number of permits for new homes, which tends to lead starts, fell for a second month in May. House prices declined somewhat in recent months, reversing some of the modest increases that occurred in the spring and summer of 2009. After changing little on net during the preceding year, interest rates for 30-year fixed-rate conforming mortgages moved lower in May and June. Real spending on equipment and software increased further early in the second quarter. Business outlays for computing equipment and software continued to rise at a brisk pace through April, and shipments of aircraft to domestic carriers rebounded. Orders and shipments of nondefense capital goods excluding transportation and high-tech equipment stayed on a noticeable uptrend, on net, in March and April, with the increases broadly based by type of equipment. The recovery in equipment and software spending was consistent with the relatively strong gains in production in recent months, improved financial conditions over the first part of the year, and the positive readings from surveys on business conditions and earnings reports for producers of capital goods. Business outlays for nonresidential construction appeared to be contracting further, on balance, in March and April, although the rate of decline seemed to be moderating. Outlays for new power plants and for manufacturing facilities firmed, and investment in drilling and mining structures continued to rise strongly. However, spending on office and commercial structures was still falling steeply through April, with the weakness likely related to high vacancy rates, falling property prices, and the light volume of sales. Businesses appeared to have begun to restock their inventories. Real nonfarm inventory investment turned positive in the first quarter, and data for April pointed to further modest accumulation. Ratios of inventories to sales for most industries looked to be within comfortable ranges. Consumer price inflation remained low in April and May. The core consumer price index rose only slightly over the period, and the year-over-year change in the index was lower than earlier this year. Core goods prices continued to decline, on net, and prices of non-energy services remained soft. The headline consumer price index edged down in both months, as the drop in the price of crude oil since April led consumer energy prices to retrace a portion of the run-up that occurred during the nine months ending in January. At earlier stages of processing, producer prices of core intermediate materials rose moderately in May after five months of large increases. Inflation compensation based on Treasury inflation-protected securities decreased recently in response to low readings on inflation and falling oil prices. Survey measures of both short- and long-term inflation expectations remained relatively stable. Unit labor costs continued to be restrained by weakness in hourly compensation and further gains in productivity. Revised estimates of labor compensation indicated that hourly compensation in the nonfarm business sector was about flat, on net, during the fourth quarter of 2009 and the first quarter of 2010. The employment cost index showed a moderate rise over the period, boosted by a sizable increase in benefit costs in the first quarter. The year-over-year increase in average hourly earnings of all employees was also moderate through May. Output per hour in the nonfarm business sector, which rose rapidly in 2009, posted a more moderate but still-solid gain in the first quarter of 2010. The U.S. international trade deficit widened slightly in April, as nominal exports fell a bit more than nominal imports. The April declines in both exports and imports followed robust increases in March. The April fall in exports reflected declines in exports of consumer goods, primarily due to a drop in pharmaceuticals, and in agricultural goods. Exports of industrial supplies moved up while exports of capital goods were flat after increasing strongly in March. Imports in April were pulled down by lower imports of consumer goods, which more than offset sharply higher imports of capital goods, particularly computing equipment. Imports of automotive products and non-oil industrial supplies declined slightly, and imports of petroleum products were flat following a large increase in March. Incoming data suggested that economic activity abroad continued to expand at a strong pace in the first half of the year. Among the advanced foreign economies, growth of real gross domestic product (GDP) in the first quarter was particularly strong in Canada and Japan, and recent indicators for those countries pointed to continued solid increases in the second quarter. In contrast, the rise in economic activity in the euro area was subdued, as favorable readings for the manufacturing sector were counterbalanced by weakness in domestic demand. Since the time of the April meeting of the Federal Open Market Committee (FOMC), concerns about the fiscal situation of several euro-area countries intensified sharply. In response, European authorities announced a number of policy measures, including acceleration of fiscal consolidation plans in some countries, finalization of an International Monetary Fund (IMF) and European Union (EU) assistance package for Greece, and the introduction of a broader €500 billion financial assistance program that could be complemented by bilateral IMF lending. The European Central Bank (ECB) also announced further measures to improve liquidity conditions in impaired markets, including a program to purchase sovereign and private debt. Economic activity in emerging market economies continued to expand briskly in the first half of this year. Growth of economic activity was particularly robust in emerging Asia, driven in part by strong increases in industrial production and exports associated with solid gains in final demand as well as the turn in the inventory cycle. The rise of real GDP in Latin America appeared to have stalled in the first quarter, but this development reflected a contraction in Mexico that more-favorable monthly indicators suggested should prove temporary. In contrast, the increase in Brazilian real GDP was very strong. Consumer price inflation in the foreign economies in aggregate was buoyed by higher food and energy prices in the first quarter, while core inflation generally remained subdued. More recent information suggested some moderation in foreign inflation in the second quarter. Staff Review of the Financial Situation The FOMC's decision at its April meeting to maintain the 0 to 1/4 percent target range for the federal funds rate and the wording of the accompanying statement were largely in line with expectations and prompted little market reaction. Economic data releases were mixed, on balance, over the intermeeting period, but market participants were especially attentive to incoming information on the labor market--most notably, the private payroll figures in the employment report for May, which were considerably weaker than investors expected. Those data, combined with heightened concerns about the global economic outlook stemming in part from Europe's sovereign debt problems, contributed to a downward revision in the expected path of policy implied by money market futures rates. In the market for Treasury coupon securities, 2- and 10-year nominal yields fell considerably over the intermeeting period. Market participants pointed to flight-to-quality flows and greater concern about the economic outlook as factors boosting the demand for Treasury securities. The drop in Treasury yields was accompanied by a small widening of swap spreads. Conditions in short-term funding markets deteriorated somewhat, particularly for European financial institutions. Spreads of the term London interbank offered rate, or Libor, over rates on overnight index swaps widened noticeably, with the availability of funding at maturities longer than one week reportedly quite limited. Market participants also reduced holdings of commercial paper sponsored by entities thought to have exposures to peripheral European financial institutions and governments. Even so, spreads of high-grade unsecured financial commercial paper to nonfinancial commercial paper widened only modestly over the intermeeting period. In secured funding markets, spreads on asset-backed commercial paper also widened modestly, while rates on repurchase agreements involving Treasury and agency collateral changed little. In the inaugural Senior Credit Officer Opinion Survey on Dealer Financing Terms, which was conducted by the Federal Reserve between May 24 and June 4, dealers generally reported that the terms on which they provided credit remained tight relative to those at the end of 2006. However, they noted some loosening of terms for both securities financing and over-the-counter derivatives transactions, on net, over the previous three months for certain classes of clients--including hedge funds, institutional investors, and nonfinancial corporations--and intensified efforts by those clients to negotiate more-favorable terms. At the same time, they reported a pickup in demand for financing across several collateral types over the past three months. Broad U.S. stock price indexes fell over the intermeeting period, in part reflecting deepening concerns about the European fiscal situation and its potential for adverse spillovers to global economic growth. Option-implied volatility on the S&P 500 index spiked in mid-May, to more than double its value at the time of the April FOMC meeting, but largely reversed its run-up by the time of the June meeting. The spread between the staff's estimate of the expected real return on equities over the next 10 years and an estimate of the expected real return on a 10-year Treasury note--a measure of the equity risk premium--increased from its already elevated level. Investors' attitudes toward financial institutions deteriorated somewhat, as the equity of financial firms underperformed the broader market amid uncertainty about the implications of developments in Europe and the potential effects of financial regulatory reform. Yields on investment- and speculative-grade corporate bonds moved higher over the intermeeting period, and high-yield bond mutual funds recorded substantial net outflows. Spreads on corporate bonds widened, although they remained within the range prevailing since last summer. Secondary-market bid prices on syndicated leveraged loans fell, while bid-asked spreads in that market widened. Net debt financing by nonfinancial corporations increased in April and May relative to its pace in the first quarter. Gross bond issuance by investment-grade nonfinancial corporations in the United States remained solid, on average, over those two months; nonfinancial commercial paper outstanding increased as well. High-yield corporate bond issuance in the United States briefly paused in May, reflecting the market's pullback from risky assets, although speculative-grade U.S. firms continued to issue bonds abroad and a few placed issues domestically in the first half of June. Gross equity issuance fell a bit, on net, in April and May, likely due in part to recent declines in equity prices and elevated market volatility. Measures of the credit quality of nonfinancial firms generally continued to improve, and first-quarter profits for firms in the S&P 500 jumped substantially, primarily reflecting an upturn in financial sector profits from quite depressed levels. The outlook in commercial real estate markets stayed weak; prices of commercial properties fell a bit further in the first quarter, and the volume of commercial property sales remained light. The delinquency rate for securitized commercial mortgages continued to climb in May, and indexes of prices of credit default swaps on commercial mortgages declined, on net, over the intermeeting period. Consumer credit contracted again in recent months, as revolving credit continued on a steep downtrend. Issuance of consumer credit asset-backed securities (ABS) increased in May, although the pace was still well below that observed before the onset of the financial crisis. Credit card ABS issuance remained subdued, partly reflecting regulatory changes that made financing credit card receivables via securitization less desirable. In primary markets, spreads of credit card interest rates over those on Treasury securities remained extremely high in April, while interest rate spreads on auto loans stayed near their average level of the past decade. Consumer credit quality improved further, with delinquency rates on credit cards and auto loans moving down a bit in April. Bank credit declined, on average, in April and May at about the same pace as in the first quarter. Commercial and industrial loans, after dropping rapidly in April, decreased at a slower pace in May. While commercial real estate and home equity loans fell at a slightly faster rate than in recent quarters, the contraction in closed-end residential loans abated, partly because of a reduced pace of sales to Fannie Mae and Freddie Mac. Consumer loans declined again, on average, in April and May. The amount of Treasury and agency securities held by large domestic banks and foreign-related institutions declined in May, contributing to a sizable drop in banks' securities holdings. On a seasonally adjusted basis, M2 contracted in April but surged in May, with much of the month-to-month variation apparently associated with the effects of federal tax payments and refunds. Averaging across the two months, M2 expanded moderately after having been about unchanged in the first quarter; liquid deposits accounted for most of the net change. The threat to global economic growth and financial stability posed by the fiscal situation in some European nations sparked widespread flight-to-quality flows over most of the intermeeting period. This retreat led to a broad appreciation of the dollar as well as declines in equity prices abroad and in yields on benchmark sovereign bonds. However, investor sentiment improved near the end of the period, leading to a partial reversal in some of these movements, despite Moody's downgrade of Greece to below-investment-grade status in mid-June. On net, the dollar ended the intermeeting period up, most headline equity indexes fell, and benchmark government bond yields declined. Strains in euro-area bank funding markets reemerged during the period. In response, the ECB announced some changes to its liquidity operations that would provide greater market access to term funding in euros.3 Difficulties also appeared in corporate debt markets as both nonfinancial and financial corporate debt issuance dropped substantially in May. In addition, pressures in dollar funding markets reappeared for foreign financial institutions, especially those thought to have significant exposure to Greece and other peripheral euro-area countries. To help contain these pressures and to prevent their spread to other institutions and regions, the Federal Reserve reestablished dollar liquidity swap arrangements with the ECB, the Bank of England, the Bank of Japan, the Bank of Canada, and the Swiss National Bank. Yields on the sovereign obligations of peripheral European countries declined noticeably following a May 10 announcement of a framework established by the EU for providing financial aid to euro-area governments and of the ECB's intention to purchase euro-area sovereign debt. However, yields remained high even after these announcements and moved up subsequently, notwithstanding the ECB's purchases of government debt. Amid a weakening outlook for economic growth in Europe, central banks in several emerging European economies began to decrease policy rates. By contrast, brighter economic prospects in Canada and China prompted the Bank of Canada to raise its target for the overnight rate to 50 basis points at its June meeting and Chinese authorities to raise banks' reserve requirement further in May. In addition, the People's Bank of China announced late in the period that it would allow the renminbi to move more flexibly, and the currency appreciated slightly immediately following the announcement. Staff Economic Outlook In the economic forecast prepared for the June FOMC meeting, the staff continued to anticipate a moderate recovery in economic activity through 2011, supported by accommodative monetary policy, an attenuation of financial stress, and strengthening consumer and business confidence. While the recent data on production and spending were broadly in line with the staff's expectations, the pace of the expansion over the next year and a half was expected to be somewhat slower than previously predicted. The intensifying concerns among investors about the implications of the fiscal difficulties faced by some European countries contributed to an increase in the foreign exchange value of the dollar and a drop in equity prices, which seemed likely to damp somewhat the expansion of domestic demand. The implications of these less-favorable factors for U.S. economic activity appeared likely to be only partly offset by lower interest rates on Treasury securities, other highly rated securities, and mortgages, as well as by a lower price for crude oil. The staff still expected that the pace of economic activity through 2011 would be sufficient to reduce the existing margins of economic slack, although the anticipated decline in the unemployment rate was somewhat slower than in the previous projection. The staff's forecasts for headline and core inflation were also reduced slightly. The changes were a response to the lower prices of oil and other commodities, the appreciation of the dollar, and the greater amount of economic slack in the forecast. Despite these developments, inflation expectations had remained stable, likely limiting movements in inflation. On balance, core inflation was expected to continue at a subdued rate over the projection period. As in earlier forecasts, headline inflation was projected to move into line with the core rate by 2011. Participants' Views of Current Conditions and the Economic Outlook In conjunction with this FOMC meeting, all meeting participants--the five members of the Board of Governors and the presidents of the 12 Federal Reserve Banks--provided projections of economic growth, the unemployment rate, and consumer price inflation for each year from 2010 through 2012 and over a longer horizon. Longer-run projections represent each participant's assessment of the rate to which each variable would be expected to converge over time under appropriate monetary policy and in the absence of further shocks. Participants' forecasts through 2012 and over the longer run are described in the Summary of Economic Projections, which is attached as an addendum to these minutes. In their discussion of the economic situation and outlook, meeting participants generally saw the incoming data and information received from business contacts as consistent with a continued, moderate recovery in economic activity. Participants noted that the labor market was improving gradually, household spending was increasing, and business spending on equipment and software had risen significantly. With private final demand having strengthened, inventory adjustments and fiscal stimulus were no longer the main factors supporting economic expansion. In light of stable inflation expectations and incoming data indicating low rates of inflation, policymakers continued to anticipate that both overall and core inflation would remain subdued through 2012. However, financial markets were generally seen as recently having become less supportive of economic growth, largely reflecting international spillovers from European fiscal strains. In part as a result of the change in financial conditions, most participants revised down slightly their outlook for economic growth, and about one-half of the participants judged the balance of risks to growth as having moved to the downside. Most participants continued to see the risks to inflation as balanced. A number of participants expressed the view that, over the next several years, both employment and inflation would likely be below levels they consider to be consistent with their dual mandate, but they anticipated that, with appropriate monetary policy, both would rise over time to levels consistent with the Federal Reserve's objectives. Financial markets had become somewhat less supportive of economic growth since the April meeting, with the developments in Europe cited as a leading cause of greater global financial market tensions. Risk spreads for many corporate borrowers had widened noticeably, equity prices had fallen appreciably, and the dollar had risen in value against a broad basket of other currencies. Participants saw these changes as likely to weigh to some degree on household and business spending over coming quarters. Participants also noted ongoing difficulties in financing commercial real estate. Nonetheless, reports suggested that more-creditworthy business borrowers were still able to obtain funding in the open markets on fairly attractive terms, and a couple of participants noted that credit from the banking sector, which had been contracting for some time, was showing some tentative signs of stabilizing. Moreover, several participants observed that the decline in yields on Treasury securities resulting from the global flight to quality was positive for the domestic economy; in particular, the associated decline in mortgage rates was seen as potentially helpful in supporting the housing sector. Supporting the view of a continued recovery, incoming data and anecdotal reports pointed to strength in a number of business sectors, particularly manufacturing and transportation. Policymakers noted that firms' investment in equipment and software had advanced rapidly of late, and they anticipated that such spending would continue to rise, though perhaps at a somewhat slower pace. Business contacts suggested that investment spending had been supported by the replacement and upgrading of existing capital, making up for some spending that had been postponed in the downturn, and this component of investment demand was seen as unlikely to remain robust. In addition, inventory accumulation, which had been a significant contributor to recent gains in production, appeared likely to provide less impetus to growth in coming quarters. Participants also noted that several uncertainties, including those related to legislative changes and to developments in global financial markets, were generating a heightened level of caution that could lead some firms to delay hiring and planned investment outlays. Participants commented that household spending continued to advance, with notable increases in auto sales and expenditures on other durable goods. Going forward, consumption spending was expected to continue to post moderate gains, with the effects of income growth and improved confidence as the economy recovers more than offsetting the effects of lower stock prices and housing wealth. However, continued labor market weakness could weigh on consumer sentiment, and households were still repairing their balance sheets; both factors could restrain consumer spending going forward. Although readings from the housing sector had been strong through mid-spring, participants noted that the strength likely reflected the effects of the temporary tax credits for homebuyers. Indeed, data for the most recent month suggested that, with the expiration of those provisions, home sales and starts had stepped down noticeably and could remain weak in the near term; with lower demand and a continuing supply of foreclosed houses coming to market, participants judged that house prices were likely to remain flat or decline somewhat further in the near term. Meeting participants interpreted the data on the labor market as consistent with their outlook for gradual recovery. Employers were adding hours to the workweek and hiring temporary workers, suggesting a pickup in labor demand; however, the most recent data on employment had been disappointing, and new claims for unemployment insurance remained elevated. Reportedly, employers were still cautious about adding to payrolls, given uncertainties about the outlook for the economy and government policies. Participants expected the pace of hiring to remain low for some time. Indeed, the unemployment rate was generally expected to remain noticeably above its long-run sustainable level for several years, and participants expressed concern about the extended duration of unemployment spells for a large number of workers. Participants also noted a risk that continued rapid growth in productivity, though clearly beneficial in the longer term, could in the near term act to moderate growth in the demand for labor and thus slow the pace at which the unemployment rate normalizes. A broad set of indicators suggested that underlying inflation remained subdued and was, on net, trending lower. The latest readings on core inflation--which excludes the relatively volatile prices of food and energy--had slowed, and other measures of the underlying trajectory of inflation, such as median and trimmed-mean measures, also had moved down this year. Crude oil prices declined somewhat over the intermeeting period, a factor that was likely to damp headline inflation at the consumer level in coming months. Other commodity prices were moderating, and nominal wages appeared to be rising only slowly. Some participants indicated that they viewed the substantial slack in labor and resource markets as likely to reduce inflation. The financial strains in Europe had led to an increase in the foreign exchange value of the dollar, and the resulting downward pressure on import prices also was expected to weigh on consumer prices for a time. However, inflation expectations were seen by most participants as well anchored, which would tend to curb any tendency for actual inflation to decline. On balance, meeting participants revised down modestly their outlook for inflation over the next couple of years; they generally expected inflation to be quite low in the near term and to trend slightly higher over time. Some participants judged the risks to the outlook for inflation as tilted to the downside, particularly in the near term, in light of the large amount of resource slack already prevailing in the economy, the significant downside risks to the outlook for real activity, and the possibility that inflation expectations could begin to decline in response to low actual inflation. A few participants cited some risk of deflation. Other participants, however, thought that inflation was unlikely to fall appreciably further given the stability of inflation expectations in recent years and very accommodative monetary policy. Over the medium term, participants saw both upside and downside risks to inflation. Several participants noted that a continuation of lower-than-expected inflation and high unemployment could eventually lead to a downward movement in inflation expectations that would reinforce disinflationary pressures. By contrast, a few participants noted the possibility that a potentially unsustainable fiscal position and the size of the Federal Reserve's balance sheet could boost inflation expectations and actual inflation over time. Committee Policy Action In their discussion of monetary policy for the period ahead, members agreed that it would be appropriate to maintain the target range of 0 to 1/4 percent for the federal funds rate. The economic outlook had softened somewhat and a number of members saw the risks to the outlook as having shifted to the downside. Nonetheless, all saw the economic expansion as likely to be strong enough to continue raising resource utilization, albeit more slowly than they had previously anticipated. In addition, they saw inflation as likely to stabilize near recent low readings in coming quarters and then gradually rise toward more desirable levels. In sum, the changes to the outlook were viewed as relatively modest and as not warranting policy accommodation beyond that already in place. However, members noted that in addition to continuing to develop and test instruments to exit from the period of unusually accommodative monetary policy, the Committee would need to consider whether further policy stimulus might become appropriate if the outlook were to worsen appreciably. Given the slightly softer cast of recent data and the shift to less accommodative financial conditions, members agreed that some changes to the statement's characterization of the economic and financial situation were necessary. Nearly all members judged that it was appropriate to reiterate the expectation that economic conditions--including low levels of resource utilization, subdued inflation trends, and stable inflation expectations--were likely to warrant exceptionally low levels of the federal funds rate for an extended period. One member, however, believed that continuing to communicate an expectation in the Committee's statement that the federal funds rate would remain at an exceptionally low level for an extended period would create conditions that could lead to macroeconomic and financial imbalances. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive:  "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability." The vote encompassed approval of the statement below to be released at 2:15 p.m.:  "Information received since the Federal Open Market Committee met in April suggests that the economic recovery is proceeding and that the labor market is improving gradually. Household spending is increasing but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad. Bank lending has continued to contract in recent months. Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be moderate for a time. Prices of energy and other commodities have declined somewhat in recent months, and underlying inflation has trended lower. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability." Voting for this action: Ben Bernanke, William C. Dudley, James Bullard, Elizabeth Duke, Donald L. Kohn, Sandra Pianalto, Eric Rosengren, Daniel K. Tarullo, and Kevin Warsh. Voting against this action: Thomas M. Hoenig. Mr. Hoenig dissented because he believed that, as the economy completed its first year of modest recovery, it was no longer advisable to indicate that economic and financial conditions were likely to warrant "exceptionally low levels of the federal funds rate for an extended period." Although risks to the forecast remained, Mr. Hoenig was concerned that communicating such an expectation would limit the Committee's flexibility to begin raising rates modestly in a timely fashion and could result in a buildup of future financial imbalances and increase the risks to longer-run macroeconomic and financial stability. By unanimous vote, the Committee selected William B. English to serve as Secretary and Economist, and James A. Clouse to serve as Associate Economist, effective July 23, 2010, until the selection of their successors at the first regularly scheduled meeting of the Committee in 2011. It was agreed that the next meeting of the Committee would be held on Tuesday, August 10, 2010. The meeting adjourned at 12:10 p.m. on June 23, 2010. Conference Call On May 9, 2010, the Committee met by conference call to discuss developments in global financial markets and possible policy responses. Over the previous several months, market concerns about the ability of Greece and some other euro-area countries to contain their sizable budget deficits and finance their debt had increased. By early May, financial strains had intensified, reflecting investors' uncertainty about whether fiscally stronger euro-area governments would provide financial support to the weakest members, the extent of the drag on euro-area economies that could result from efforts at fiscal consolidation, and the degree of exposure of major European banks and financial institutions to vulnerable countries. Conditions in short-term funding markets in Europe had also deteriorated, and global financial markets more generally had been volatile and less supportive of economic growth. The Chairman indicated that European authorities were considering a number of measures to promote fiscal sustainability and to provide increased liquidity and support to money markets and markets for European sovereign debt. In connection with the possible implementation of these measures, some major central banks had requested that dollar liquidity swap lines with the Federal Reserve be reestablished. These swap lines would enhance the ability of these central banks to provide support for dollar funding markets in their jurisdictions. The terms and conditions of the swap lines would generally be similar to those in place prior to their expiration earlier in the year. The Committee discussed considerations surrounding the possible reestablishment of dollar liquidity swap lines. Participants agreed that such arrangements could be helpful in limiting the strains in dollar funding markets and the adverse implications of recent developments for the U.S. economy. Participants observed that, in current circumstances, the dollar swap lines should be made available to a smaller number of major foreign central banks than previously. In order to promote the transparency of these arrangements, participants agreed that it would be appropriate for the Federal Reserve to publish the swap contracts and to release on a weekly basis the amounts of draws under the swap lines by central bank counterparty. It was recognized that the Committee would need to consider the implications of swap lines for bank reserves and overall management of the Federal Reserve's balance sheet. Participants noted the importance of appropriate consultation with U.S. government officials and emphasized that a reestablishment of the lines should be contingent on strong and effective actions by authorities in Europe to address fiscal sustainability and support financial markets. At the conclusion of the discussion, the Committee voted unanimously to approve the following resolution:  "The Committee authorizes the Chairman to agree to establish swap lines with the European Central Bank, the Bank of England, the Swiss National Bank, the Bank of Japan, and the Bank of Canada, as discussed by the Committee today." Secretary's note: Later on May 9, 2010, the Federal Reserve, in coordination with the Bank of Canada, the Bank of England, the European Central Bank (ECB), and the Swiss National Bank, announced that U.S. dollar liquidity swap facilities had been reestablished with those central banks. The arrangements with the Bank of England, the ECB, and the Swiss National Bank provide these central banks with the capacity to conduct tenders of U.S. dollars in their local markets at fixed rates for full allotment, similar to arrangements that had been in place previously. The arrangement with the Bank of Canada would support drawings of up to $30 billion, as was the case previously. On May 10, the Federal Reserve and the Bank of Japan (BOJ) announced that a temporary U.S. dollar liquidity swap arrangement had been established that would provide the BOJ with the capacity to conduct tenders of U.S. dollars at fixed rates for full allotment. Notation Vote By notation vote completed on May 17, 2010, the Committee unanimously approved the minutes of the FOMC meeting held on April 27–28, 2010.   _____________________________ Brian F. Madigan Secretary 1. Attended Tuesday's session only. Return to text 2. Attended Wednesday's session only. Return to text 3. The ECB reinstituted a six-month lending operation and switched its three-month lending operations from fixed-quantity auctions to full-allotment offerings at a fixed rate of 1 percent. Return to text Return to top

2010-05-09

Statement

In response to the reemergence of strains in U.S. dollar short-term funding markets in Europe, the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, and the Swiss National Bank are announcing the reestablishment of temporary U.S. dollar liquidity swap facilities. These facilities are designed to help improve liquidity conditions in U.S. dollar funding markets and to prevent the spread of strains to other markets and financial centers. The Bank of Japan will be considering similar measures soon. Central banks will continue to work together closely as needed to address pressures in funding markets. Federal Reserve ActionsThe Federal Open Market Committee has authorized temporary reciprocal currency arrangements (swap lines) with the Bank of Canada, the Bank of England, the European Central Bank (ECB), and the Swiss National Bank. The arrangements with the Bank of England, the ECB, and the Swiss National Bank will provide these central banks with the capacity to conduct tenders of U.S. dollars in their local markets at fixed rates for full allotment, similar to arrangements that had been in place previously. The arrangement with the Bank of Canada would support drawings of up to $30 billion, as was the case previously. These swap arrangements have been authorized through January 2011. Further details on these arrangements will be available shortly. Information on Related Actions Being Taken by Other Central BanksInformation on the actions that will be taken by other central banks is available at the following websites: Bank of Canada       Bank of England     European Central Bank    Bank of Japan (57 KB PDF)    Swiss National Bank (60 KB PDF)    U.S. Dollar Liquidity Swaps FAQs (51 KB PDF)

2010-05-19

Minute

A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held in the offices of the Board of Governors in Washington, D.C., on Tuesday, April 27, 2010, at 2:00 p.m. and continued on Wednesday, April 28, 2010, at 9:00 a.m. PRESENT: Ben Bernanke, Chairman William C. Dudley, Vice Chairman James Bullard Elizabeth Duke Thomas M. Hoenig Donald L. Kohn Sandra Pianalto Eric Rosengren Daniel K. Tarullo Kevin Warsh Christine Cumming, Charles L. Evans, Narayana Kocherlakota, and Charles I. Plosser, Alternate Members of the Federal Open Market Committee Jeffrey M. Lacker, Dennis P. Lockhart, and Janet L. Yellen, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco, respectively Helen E. Holcomb, First Vice President, Federal Reserve Bank of Dallas Brian F. Madigan, Secretary and Economist Matthew M. Luecke, Assistant Secretary David W. Skidmore, Assistant Secretary Michelle A. Smith, Assistant Secretary Scott G. Alvarez, General Counsel Thomas C. Baxter, Deputy General Counsel Nathan Sheets, Economist David J. Stockton, Economist Alan D. Barkema, Thomas A. Connors, William B. English, Jeff Fuhrer, Steven B. Kamin, Simon Potter, Lawrence Slifman, Mark S. Sniderman, Christopher J. Waller, and David W. Wilcox, Associate Economists Brian Sack, Manager, System Open Market Account Jennifer J. Johnson, Secretary of the Board, Office of the Secretary, Board of Governors Patrick M. Parkinson, Director, Division of Bank Supervision and Regulation, Board of Governors Robert deV. Frierson,1 Deputy Secretary, Office of the Secretary, Board of Governors Charles S. Struckmeyer, Deputy Staff Director, Office of the Staff Director for Management, Board of Governors James A. Clouse, Deputy Director, Division of Monetary Affairs, Board of Governors Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors William Nelson, Senior Associate Director, Division of Monetary Affairs, Board of Governors; Nellie Liang, David Reifschneider, and William Wascher, Senior Associate Directors, Division of Research and Statistics, Board of Governors Seth B. Carpenter, Associate Director, Division of Monetary Affairs, Board of Governors Christopher J. Erceg, Deputy Associate Director, Division of International Finance, Board of Governors; Egon Zakrajšek, Deputy Associate Director, Division of Monetary Affairs, Board of Governors Brian J. Gross, Special Assistant to the Board, Office of Board Members, Board of Governors David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors Jennifer E. Roush, Senior Economist, Division of Monetary Affairs, Board of Governors Kurt F. Lewis, Economist, Division of Monetary Affairs, Board of Governors Penelope A. Beattie, Assistant to the Secretary, Office of the Secretary, Board of Governors Kimberley E. Braun, Records Project Manager, Division of Monetary Affairs, Board of Governors Randall A. Williams, Records Management Analyst, Division of Monetary Affairs, Board of Governors Esther L. George, First Vice President, Federal Reserve Bank of Kansas City Loretta J. Mester, Harvey Rosenblum, and John C. Williams, Executive Vice Presidents, Federal Reserve Banks of Philadelphia, Dallas, and San Francisco, respectively David Altig, Richard P. Dzina, Daniel G. Sullivan, and John A. Weinberg, Senior Vice Presidents, Federal Reserve Banks of Atlanta, New York, Chicago, and Richmond, respectively Warren Weber, Senior Research Officer, Federal Reserve Bank of Minneapolis Developments in Financial Markets and the Federal Reserve's Balance Sheet The Manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets during the period since the Committee met on March 16, 2010. The Manager also reported on System open market operations in Treasury securities and in agency debt and agency mortgage-backed securities (MBS) during the intermeeting period. By unanimous vote, the Committee ratified those transactions. There were no open market operations in foreign currencies for the System's account over the intermeeting period. By unanimous vote, the Committee decided to extend the reciprocal currency ("swap") arrangements with the Bank of Canada and the Banco de Mexico for an additional year, beginning in mid-December 2010; these arrangements are associated with the Federal Reserve's participation in the North American Framework Agreement of 1994. The arrangement with the Bank of Canada is in the amount of $2 billion equivalent, and the arrangement with the Banco de Mexico is in the amount of $3 billion equivalent. The vote to renew the System's participation in these swap arrangements was taken at this meeting because of a provision in the arrangements that requires each party to provide six months' prior notice of an intention to terminate its participation. The staff also briefed the Committee on recent progress in the development of reserve draining tools. The Desk was preparing to conduct small-scale reverse repurchase operations to ensure its ability to use agency MBS collateral. It also continued to work toward expansion of the set of counterparties for reverse repurchase operations. The staff noted that the Board had recently approved changes to Regulation D that would be necessary for the establishment of a term deposit facility. The staff next gave a presentation on potential longer-run strategies for managing the SOMA. At previous meetings, Committee participants had expressed support for steps to reduce the size of the Federal Reserve's balance sheet over time and return the composition of the SOMA to only Treasury securities. The staff discussed the potential portfolio paths and macroeconomic consequences of a number of different strategies for accomplishing these objectives. To date, the Desk had been reinvesting the proceeds of all maturing Treasury securities in newly issued Treasury securities, but it had not been reinvesting principal and interest payments on maturing agency debt and agency MBS, nor had it been selling securities. One strategy considered in the staff presentation was a continuation of the current practice, which would normalize the balance sheet very gradually. In addition, the staff presented information on a number of other strategies that included sales of SOMA holdings of agency debt and MBS and under which the proceeds of maturing Treasury securities would not be reinvested; these strategies differed by the date and circumstances under which sales would be initiated, by the average pace of sales, and by the degree to which the timing and pace of such sales would be adjusted in response to financial and economic developments. Meeting participants agreed broadly on key objectives of a longer-run strategy for asset sales and redemptions. The strategy should be consistent with the achievement of the Committee's objectives of maximum employment and price stability. In addition, the strategy should normalize the size and composition of the balance sheet over time. Reducing the size of the balance sheet would decrease the associated reserve balances to amounts consistent with more normal operations of money markets and monetary policy. Returning the portfolio to its historical composition of essentially all Treasury securities would minimize the extent to which the Federal Reserve portfolio might be affecting the allocation of credit among private borrowers and sectors of the economy. Most participants expressed a preference for strategies that would eventually entail sales of agency debt and MBS in order to return the size and composition of the Federal Reserve's balance sheet to a more normal configuration more quickly than would be accomplished by simply letting MBS and agency securities run off. They agreed that sales of agency debt and MBS should be implemented in accordance with a framework communicated in advance and be conducted at a gradual pace that potentially could be adjusted in response to changes in economic and financial conditions. Participants expressed a range of views on some of the details of a strategy for asset sales. Most participants favored deferring asset sales for some time. A majority preferred beginning asset sales some time after the first increase in the Federal Open Market Committee's (FOMC) target for short-term interest rates. Such an approach would postpone any asset sales until the economic recovery was well established and would maintain short-term interest rates as the Committee's key monetary policy tool. Other participants favored a strategy in which the Committee would soon announce a general schedule for future asset sales, with a date for the initiation of sales that would not necessarily be linked to the increase in the Committee's interest rate target. A few preferred to begin sales relatively soon. Earlier sales would normalize the size and composition of the balance sheet sooner and would unwind at least part of the unconventional policy stimulus put in place during the crisis before conventional policy firming got under way. Some participants saw advantages to varying the FOMC's holdings of longer-term assets system-atically in response to economic and financial developments. However, others thought that a pre-announced pace of sales that was unlikely to vary much would provide a high degree of certainty about sales, helping to limit disruptions in financial markets. The views of participants also differed to some extent regarding the appropriate pace of asset sales. Most preferred that the agency debt and MBS held in the portfolio be sold at a gradual pace that would complete the sales about five years after they began. One possibility would be for the pace to be relatively slow initially but to increase over time, allowing markets to adjust gradually. A couple of participants thought faster sales, conducted over about three years, would be appropriate and felt that such a pace would not put undue strain on financial markets. In their view, a relatively brisk pace of sales would reduce the chance that the elevated size of the Federal Reserve's balance sheet and the associated high level of reserve balances could raise inflation expectations and inflation beyond levels consistent with price stability or could generate excessive growth of credit when the economy and banking system recover more fully. Participants saw both advantages and disadvantages to not rolling over Treasury securities as they mature. On the one hand, redeeming Treasury securities would contribute to a more expeditious normalization of the size of the balance sheet and the quantity of reserves. On the other hand, such redemptions could put upward pressure on interest rates and would tend to work against the objective of returning the SOMA to an all-Treasuries composition. No decisions about the Committee's longer-run strategy for asset sales and redemptions were made at this meeting. For the time being, participants agreed that the Desk should continue the interim approach of allowing all maturing agency debt and all prepayments of agency MBS to be redeemed without replacement while rolling over all maturing Treasury securities. Participants agreed to give further consideration to their longer-run strategy at a later date. Staff Review of the Economic Situation The information reviewed at the April 27-28 meeting suggested that, on balance, the economic recovery was proceeding at a moderate pace and that the deterioration in the labor market was likely coming to an end. Consumer spending continued to post solid gains in the first three months of the year, and business investment in equipment and software appeared to have increased significantly further in the first quarter. In addition, growth of manufacturing output remained brisk, and gains became more broadly based across industries. However, residential construction, while having edged up, was still depressed, construction of nonresidential buildings remained on a steep downward trajectory, and state and local governments continued to retrench. Consumer price inflation remained low. The labor market showed signs of a nascent recovery in recent months. Private nonfarm payroll employment increased over the first quarter of 2010--the first quarterly increase since the onset of the recession. The average workweek also rose last quarter and data from the household survey pointed to a firming in labor market conditions. The unemployment rate held steady at 9.7 percent throughout the first quarter, and the labor force participation rate increased over the past few months following sharp declines over the second half of last year. The number of new job losers as a percentage of household employment continued to drop, and the fraction of workers on part-time schedules for economic reasons moved down since the end of last year. Nonetheless, finding a job remained very difficult, and the average duration of unemployment spells increased further. Industrial production continued to expand at a brisk pace during the first quarter. Recent production gains remained broadly based across industries, as both foreign demand and a mild restocking of inventories contributed positively to output growth. Capacity utilization stood significantly above the trough recorded last June but was still well below its long-run average. Light motor vehicle production stepped up in March, and assemblies in the first quarter were above their fourth-quarter average as automakers cautiously began to rebuild dealers' inventories. Production in high-tech industries increased solidly, and available indicators pointed toward further expansion in this sector in the near term. On balance, indicators of near-term manufacturing activity remained quite positive. Consumer spending continued to rise at a solid pace through March, with recent gains pronounced for most non-auto goods and food services. Despite signs of improvement recently, the determinants of spending remained subdued. While wages and salaries picked up early this year, real disposable income was flat in February after a slight decline in January; housing wealth was still well below its level prior to the crisis. Furthermore, although banks indicated a somewhat greater willingness to lend to consumers in recent months, terms and standards on consumer loans remained restrictive. Additionally, consumer sentiment dropped back in early April and was little changed, on net, since the beginning of the year. Starts of new single-family homes edged up, on net, over February and March, but much of this increase likely reflected delayed projects getting under way as weather conditions returned to normal. Home sales strengthened noticeably, as sales of new single-family homes jumped and sales of existing single-family homes rose as well. However, both new home sales and existing home sales were likely boosted, at least in part, by the anticipated expiration of the homebuyer tax credit. Interest rates for conforming 30-year fixed-rate mortgages changed little in recent months and remained at levels that were very low by historical standards. Real spending on equipment and software continued to rebound in the first quarter. Investment in high-tech equipment and transportation advanced further, and real spending for equipment other than high-tech and transportation appeared to turn up sharply after falling for more than a year, suggesting that the recovery in equipment and software investment became more broadly based. The recovery in equipment and software spending was consistent with the strengthening in many indicators of business activity. In contrast, the nonresidential construction sector continued to contract. Real outlays on structures outside drilling and mining fell steeply last year, and recent data on nominal expenditures through February suggested a further decline in the first quarter. The weakness was widespread across categories and likely reflected elevated vacancy rates, low levels of property prices, and difficulties in obtaining financing for new projects. Real spending on drilling and mining structures picked up strongly over the second half of last year in response to the rebound in oil and natural gas prices. Available data suggested that the pace of inventory liquidation moderated further in the first quarter after slowing sharply in the fourth quarter of last year. Inventories appeared to approach comfortable levels relative to sales in the aggregate, although inventory positions across industries varied. Months' supply remained elevated for equipment, materials, and, to a lesser degree, construction supplies. By contrast, inventories of consumer goods, business supplies, and high-tech goods appeared low relative to demand. Consumer price inflation was low in recent months; both headline and core personal consumption expenditures (PCE) prices were estimated to have risen slightly in March after remaining unchanged in February. On a 12-month change basis, core PCE prices slowed over the year ending in March, with deceleration widespread across categories of expenditures. In contrast, the corresponding change in the headline index moved up noticeably, as energy prices rebounded. Survey measures of long-term inflation expectations were fairly stable in recent months at levels slightly lower than those posted a year ago. Meanwhile, measures of inflation compensation based on Treasury inflation-protected securities (TIPS) edged up slightly. Cost pressures from rising commodity prices showed through to prices at early stages of processing, and the producer price index for core intermediate materials continued to rise rapidly through March. However, measures of labor costs decelerated sharply last year, as compensation per hour in the nonfarm business sector increased only slightly over the four quarters of 2009. The U.S. international trade deficit widened in February, as a rise in nominal imports outpaced a small increase in exports. Increased exports of industrial supplies, capital goods, and automotive products were partly offset by declines in agricultural goods and consumer goods. The February rise in imports reversed a similarly sized decrease in January. Imports of oil accounted for more than one-third of the January decline, reflecting lower volumes, but they accounted for only about one-tenth of the February increase, as volumes rebounded but prices fell. Imports of capital goods rose as strong computer imports more than offset falling aircraft purchases, and imports of industrial supplies and consumer goods also moved up. Recent indicators in the advanced foreign economies suggested a continued divergence in the pace of recovery, with a strong performance in Canada, a moderate expansion in Japan, and a more subdued rebound in Europe. Fiscal strains in Greece intensified during the intermeeting period, and in mid-April, euro-area member states announced a plan to provide financing aid to Greece in coordination with the International Monetary Fund. However, at the time of the April FOMC meeting, no official agreement had been reached concerning the scale, composition, and implementation of such an aid package. Economic activity in emerging markets continued to expand robustly in the first quarter. Despite the strength of exports, merchandise trade balances declined for some countries where strong domestic demand caused imports to outpace exports. In China, real gross domestic product (GDP) increased at a higher-than-expected annual rate in the first quarter as the economic recovery remained broad based, with industrial production, investment, and domestic demand continuing to grow briskly. In Latin America, indicators suggested that economic activity in Mexico and Brazil expanded further in the first quarter. Foreign inflation was boosted by increases in the prices of oil and other commodities, but core inflation generally remained subdued. Staff Review of the Financial Situation The decision by the FOMC at the March meeting to keep the target range for the federal funds rate unchanged and to retain the "extended period" language in the statement was largely anticipated by market participants. However, some market participants reportedly interpreted the retention of the "extended period" language as pointing to a longer period of low rates than previously expected, and Eurodollar futures rates temporarily declined a bit in response. On balance over the intermeeting period, the expected path of policy edged down slightly. Yields on 2-year and 10-year nominal Treasury securities posted small mixed changes amid some volatility that reportedly reflected evolving views about the U.S. fiscal outlook, prospects for U.S. economic growth, and the fiscal situation in peripheral European countries. Inflation compensation--the difference between nominal Treasury yields and yields on TIPS--rose some over the period, but survey measures of longer-term inflation expectations were about unchanged. Overall, conditions in short-term funding markets remained generally stable during the intermeeting period. Spreads between London interbank offered rates (Libor) and overnight index swap (OIS) rates were about unchanged at levels near those that prevailed in late 2007, although they began to edge up in the final days of the intermeeting period. Spreads in the commercial paper market were little changed. Equity indexes rose, on balance, over the intermeeting period, with bank shares outperforming the broader market. Stock prices were supported by somewhat better-than-expected macroeconomic data and a favorable response by investors to the initial batch of first-quarter earnings reports, especially those of banking institutions. Option-implied volatility on the S&P 500 index generally declined over the period but jumped at end of April on renewed concerns regarding the fiscal situation in Greece. The gap between the staff's estimate of the expected real equity return over the next 10 years for S&P 500 firms and the real 10-year Treasury yield--a rough measure of the equity risk premium--remained well above its average over the past decade. Yields on investment-grade corporate bonds edged down, leaving their spreads to comparable-maturity Treasury securities a bit lower, at levels around those that prevailed in late 2007. Consistent with more-favorable investor sentiment toward risky assets, yields and spreads on speculative-grade corporate bonds declined, and secondary market prices of syndicated leveraged loans rose further. Overall, net debt financing by nonfinancial firms was positive in March. Issuance of nonfinancial bonds surged, and net issuance of commercial paper rebounded appreciably. Net equity issuance by nonfinancial firms was negative again in the first quarter as the solid pace of gross public issuance was more than offset by equity retirements from both cash-financed mergers and share repurchases. Financial firms issued a significant volume of debt securities in the first quarter and also raised a moderate amount of gross funds in the equity market, a pattern that appeared to continue in the first half of April. Credit quality in the commercial real estate sector continued to deteriorate as the delinquency rate for securitized commercial mortgages increased again in March. The decline in outstanding commercial mortgage debt in the fourth quarter of last year was the largest on record. Nonetheless, indexes of prices for credit default swaps on commercial mortgage-backed securities ticked up noticeably over the period, in line with the overall reduction in financial market risk premiums. The conclusion of purchases under the Federal Reserve's agency MBS program had only a modest market effect. Over the intermeeting period, spreads on agency MBS retraced much of the increase seen around the time of the program's conclusion, ending the period roughly unchanged. The factors contributing to the recent narrowing of MBS and mortgage spreads included the low level of mortgage originations, which damped the supply of new MBS, and Fannie Mae's and Freddie Mac's increased purchases of mortgages through their buyouts of delinquent loans. Consumer credit continued to trend lower in recent months, pushed down by a steep decline in revolving credit. Spreads on high-quality credit card and auto loan asset-backed securities (ABS) edged down over the period, with little upward pressure evident from the end of the portion of the Term Asset-Backed Securities Loan Facility supporting ABS. Nonetheless, fewer ABS were issued in the first quarter than in the fourth quarter, reflecting continued weakness in loan originations. Delinquency rates on consumer loans edged down further in February but remained very elevated. Spreads of interest rates on credit cards over yields on two-year Treasury securities continued to drift upward, while interest rates on new auto loans at dealerships and their spreads over yields on five-year Treasury securities extended their previous decline. After adjusting to remove the effects of banks' adoption of Financial Accounting Standards 166 and 167, bank credit contracted again in March, as both loans and securities holdings declined.2 The contraction in commercial and industrial loans remained pronounced. The drop in commercial real estate loans persisted, reflecting weak fundamentals that limited originations as well as charge-offs of existing loans. Residential real estate loans also decreased further in March, as did credit card loans and other consumer loans. M2 fell in March, reflecting a slowing in the expansion of liquid deposits along with a further contraction in small time deposits and a steep runoff in retail money market mutual funds. Currency grew at a moderate pace, likely as a result of continued demand for U.S. banknotes from abroad coupled with solid domestic demand. The monetary base contracted as the effect on reserves of purchases under the Federal Reserve's large-scale asset purchase programs was more than offset by a further contraction in credit outstanding under liquidity and credit facilities and an increase in the Treasury's balances at the Federal Reserve. Until the intensification of the Greek crisis near the end of the intermeeting period, equity indexes were higher in nearly all countries, and emerging-market risk spreads had generally declined. These moves appeared to reflect growing confidence that the global recovery was gaining momentum, particularly in emerging market economies. However, sovereign debt spreads in Greece, Portugal, and other peripheral European countries widened in the days leading up to the April FOMC meeting, as investor anxiety about the fiscal situation in those countries increased. Downgrades to the credit ratings of Greece and Portugal weighed on investor sentiment, and global markets retraced some of their earlier gains. Over the intermeeting period, the Bank of Japan doubled the size of its three-month fixed-rate funds facility, the Bank of Canada dropped its conditional commitment to keeping rates steady through the first half of the year, and the Reserve Bank of Australia raised its policy rate. The trade-weighted value of the dollar changed little, on net; gains against the euro and yen were offset by declines against many emerging market currencies. Staff Economic Outlook The economic forecast prepared by the staff for the April FOMC meeting was similar to that developed for the March meeting. The staff continued to project that the accommodative stance of monetary policy, together with a further attenuation of financial stress, the waning of adverse effects of earlier declines in wealth, and improving household and business confidence, would support a moderate recovery in economic activity and a gradual decline in the unemployment rate over the next two years. The staff forecast for both real GDP growth and the unemployment rate through the end of 2011 was roughly in line with previous projections. Recent data on core consumer prices led the staff to mark down slightly its forecast for core PCE inflation. The staff continued to anticipate that downward pressure on inflation from the substantial amount of projected resource slack would be tempered by stable inflation expectations. With energy price increases expected to slow next year, total PCE inflation was seen as likely to fall back in line with core inflation by the end of 2011, as in previous projections. Participants' Views on Current Conditions and the Economic Outlook In conjunction with this FOMC meeting, all meeting participants--the five members of the Board of Governors and the presidents of the 12 Federal Reserve Banks--provided projections of economic growth, the unemployment rate, and consumer price inflation for each year from 2010 through 2012 and over a longer horizon. Longer-run projections represent each participant's assessment of the rate to which each variable would be expected to converge over time under appropriate monetary policy and in the absence of further shocks. Participants' forecasts through 2012 and over the longer run are described in the Summary of Economic Projections, which is attached as an addendum to these minutes. In their discussion of the economic situation and outlook, meeting participants agreed that the incoming data and information received from business contacts indicated that economic activity continued to strengthen and the labor market was beginning to improve. Although some of the recent data on economic activity had been better than anticipated, most participants saw the incoming information as broadly in line with their earlier projections for moderate growth; accordingly, their views on the economic outlook had not changed appreciably. Participants expected the economic recovery to continue, but, consistent with experience following previous financial crises, most anticipated that the pickup in output would be rather slow relative to past recoveries from deep recessions. A moderate pace of expansion, in turn, would imply only a modest improvement in the labor market this year, with the unemployment rate declining gradually. Most participants again projected that the economy would grow somewhat faster in 2011 and 2012, generating a more pronounced decline in the unemployment rate. In light of stable longer-term inflation expectations and the likely continuation of substantial resource slack, policymakers anticipated that both overall and core inflation would remain subdued through 2012, with measured inflation somewhat below rates that policymakers considered to be consistent over the longer run with the Federal Reserve's dual mandate. Participants expected that economic growth would continue: Recent data pointed to significant gains in retail sales, business spending on equipment and software had picked up substantially, and reports from business contacts and regional surveys indicated that production was increasing briskly in many sectors. Participants agreed that the growth in real GDP appeared to reflect a strengthening of private final demand and not just fiscal stimulus and a slower pace of inventory decumulation; this welcome development lessened policymakers' concerns about the economy's ability to maintain a self-sustaining recovery without government support. Businesses appeared to be gaining confidence in the economic recovery, and narrowing credit spreads in private debt markets were allowing low policy rates to be reflected more fully in the cost of capital. At the same time, rising stock prices and the apparent stabilization of house prices were helping to repair household balance sheets. As a result, consumers and firms were beginning to satisfy demands for durable goods and capital equipment that had been postponed during the economic downturn. Many participants noted that employment had increased in recent months, and that they expected a further firming of labor market conditions going forward. A stronger labor market could continue to boost consumer and business confidence and so contribute to further gains in spending. Although these developments were positive, participants noted several factors that likely would continue to restrain expansion in economic activity and posed some downside risks. The recent increase in consumer spending appeared to be supported importantly by pent-up demands and possibly by other temporary factors, such as unusually large income tax refunds. With the personal saving rate having dropped back to a relatively low level, it seemed unlikely that consumer spending would be the major factor driving growth as the recovery progressed. Moreover, the recovery in the housing market appeared to have stalled in recent months despite various forms of government support. Although residential real estate values seemed to be stabilizing and in some areas had reportedly moved higher, housing sales and starts had leveled off in recent months at depressed levels. Some participants saw the possibility of elevated foreclosures adding to the already very large inventory of vacant homes as posing a downside risk to home prices, thereby limiting the extent of the pickup in residential investment for a while. In the business sector, prospects for nonresidential construction outside the energy sector remained weak. Commercial real estate activity continued to fall in most parts of the country as a result of deteriorating fundamentals, including declining occupancy and rental rates and tight credit conditions. However, a number of participants noted that investment in equipment and software had been strengthening, and they relayed anecdotal information from their business contacts that suggested continued growth in orders for capital equipment. Business investment was expected to be supported by improved conditions in financial markets. Large firms with access to capital markets appeared to be having little difficulty in obtaining credit, and in many cases they also had ample retained earnings with which to fund their operations and investment. However, many participants noted that while financial markets had improved, bank lending was still contracting and credit remained tight for many borrowers. Smaller firms in particular reportedly continued to face substantial difficulty in obtaining bank loans. Because such firms tend to be more dependent on commercial banks for financing, participants saw limited credit availability as a potential constraint on future investment and hiring by small businesses, which normally are a significant source of employment growth in recoveries. Some participants noted that many small and regional banks were vulnerable to deteriorating performance of commercial real estate loans. Economic conditions abroad, especially in several emerging Asian economies, continued to strengthen in recent months, contributing to gains in U.S. exports. However, participants saw the escalation of fiscal strains in Greece and spreading concerns about other peripheral European countries as weighing on financial conditions and confidence in the euro area. If other European countries responded by intensifying their fiscal consolidation efforts, the result would likely be slower growth in Europe and potentially a weaker global economic recovery. Some participants expressed concern that a crisis in Greece or in some other peripheral European countries could have an adverse effect on U.S. financial markets, which could also slow the recovery in this country. Developments in labor markets were positive over the intermeeting period. Nonfarm payrolls posted a modest gain in March, and the upturn in private employment was widespread across industries. Nevertheless, participants remained concerned about elevated unemployment, including high levels of long-term unemployment and permanent separations, which were seen as potentially leading to the loss of worker skills and greater needs for labor reallocation that could slow employment growth going forward. Moreover, information from business contacts generally underscored the degree to which firms' reluctance to add to payrolls or start large capital projects reflected uncertainty about the economic outlook and future government policies. A number of participants pointed out that the economic recovery could eventually lose traction without a substantial pickup in job creation. Participants cited a wide array of evidence as indications that underlying inflation remained subdued. The latest readings on core inflation--which exclude the relatively volatile prices of food and energy--were generally lower than they had anticipated. One participant noted that core inflation had been held down in recent quarters by unusually slow increases in the price index for shelter, and that the recent behavior of core inflation might be a misleading signal of the underlying inflation trend. However, a number of participants pointed out that the recent moderation in price changes was widespread across many categories of spending and was evident in measures that exclude the most extreme price movements in each period. In addition, survey measures of longer-term inflation expectations remained fairly stable, wage growth continued to be restrained, and unit labor costs were still falling; reports from business contacts also suggested that pricing power remained limited. Against this backdrop, most participants anticipated that substantial resource slack and stable longer-term inflation expectations would likely keep inflation subdued for some time. Participants' assessments of the risks to the inflation outlook were mixed. Some participants saw the risks to inflation as tilted to the downside in the near term, reflecting the quite elevated level of economic slack and the possibility that inflation expectations could begin to decline in response to the low level of actual inflation. Others, however, saw the balance of risks as pointing to potentially higher inflation and cited pressures on commodity and energy prices associated with expanding global economic activity as an upside inflation risk; some also noted the possibility that inflation expectations could rise as a result of the public's concerns about the extraordinary size of the Federal Reserve's balance sheet in a period of very large federal budget deficits. While survey measures of longer-term inflation expectations had been fairly stable, some market-based measures of inflation expectations and inflation risk suggested increased concern among market partici-pants about higher inflation. To keep inflation expectations well anchored, all participants agreed that it was important for policy to be responsive to changes in the economic outlook and for the Federal Reserve to continue to communicate clearly its ability and intent to begin withdrawing monetary policy accommodation at the appropriate time and pace. Committee Policy Action In the members' discussion of monetary policy for the period ahead, they agreed that no changes to the Committee's federal funds rate target range were warranted at this meeting. On balance, the economic outlook had changed little since the March meeting. Even though the recovery appeared to be continuing and was expected to strengthen gradually over time, most members projected that economic slack would continue to be quite elevated for some time, with inflation remaining below rates that would be consistent in the longer run with the Federal Reserve's dual objectives. Based on this outlook, members agreed that it would be appropriate to maintain the target range of 0 to ¼ percent for the federal funds rate. In addition, nearly all members judged that it was appropriate to reiterate the expectation that economic conditions--including low levels of resource utilization, subdued inflation trends, and stable inflation expectations--were likely to warrant exceptionally low levels of the federal funds rate for an extended period. As at previous meetings, a few members noted that at the current juncture, the risks of an early start to policy tightening exceeded those associated with a later start, because the scope for more accommodative policy was limited by the effective lower bound on the federal funds rate, while the Committee could be flexible in adjusting the magnitude and pace of tightening in response to evolving economic circumstances. In light of the improved functioning of financial markets, Committee members agreed that it would be appropriate for the statement to be released following the meeting to indicate that the previously announced schedule for closing the Term Asset-Backed Securities Loan Facility was being maintained. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to ¼ percent. The Committee directs the Desk to engage in dollar roll transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability." The vote encompassed approval of the statement below to be released at 2:15 p.m.: "Information received since the Federal Open Market Committee met in March suggests that economic activity has continued to strengthen and that the labor market is beginning to improve. Growth in household spending has picked up recently but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly; however, investment in nonresidential structures is declining and employers remain reluctant to add to payrolls. Housing starts have edged up but remain at a depressed level. While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time. The Committee will maintain the target range for the federal funds rate at 0 to ¼ percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability. In light of improved functioning of financial markets, the Federal Reserve has closed all but one of the special liquidity facilities that it created to support markets during the crisis. The only remaining such program, the Term Asset-Backed Securities Loan Facility, is scheduled to close on June 30 for loans backed by new-issue commercial mortgage-backed securities; it closed on March 31 for loans backed by all other types of collateral." Voting for this action: Ben Bernanke, William C. Dudley, James Bullard, Elizabeth Duke, Donald L. Kohn, Sandra Pianalto, Eric Rosengren, Daniel K. Tarullo, and Kevin Warsh. Voting against this action: Thomas M. Hoenig. Mr. Hoenig dissented because he believed it was no longer advisable to indicate that economic and financial conditions were likely to warrant "exceptionally low levels of the federal funds rate for an extended period." Mr. Hoenig was concerned that communicating such an expectation could lead to the buildup of future financial imbalances and increase the risks to longer-run macroeconomic and financial stability, while limiting the Committee's flexibility to begin raising rates modestly in the near term. Mr. Hoenig believed that the target for the federal funds rate should be increased toward 1 percent this summer, and that the Committee could then pause to further assess the economic outlook. He believed this approach would leave considerable policy accommodation in place to foster an expected gradual decline in unemployment in the quarters ahead and would reduce the risk of an increase in financial imbalances and inflation pressures in coming years. It would also mitigate the need to push the policy rate to higher levels later in the expansionary phase of the economic cycle. It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, June 22-23, 2010. The meeting adjourned at 12:50 p.m. on April 28, 2010. Notation Vote By notation vote completed on April 5, 2010, the Committee unanimously approved the minutes of the FOMC meeting held on March 16, 2010. _____________________________ Brian F. Madigan Secretary 1. Attended Tuesday's session only. Return to text 2. The new accounting standards make it more difficult for U.S. banks to hold assets off balance sheet. Banks adopted the standards in the fourth quarter of 2009 and the first quarter of 2010. The cumulative effects of the resulting asset consolidation were incorporated in the bank credit data published on the Federal Reserve's H.8 Statistical Release "Assets and Liabilities of Commercial Banks in the United States" as of March 31, 2010. While all major loan categories were affected to some degree by banks' adoption of Financial Accounting Standards 166 and 167, the largest effect was on credit card loans on commercial bank balance sheets; banks also consolidated significant amounts of other consumer loans, commercial and industrial loans, and residential real estate loans. Return to text Return to top

2010-04-28

Statement

Information received since the Federal Open Market Committee met in March suggests that economic activity has continued to strengthen and that the labor market is beginning to improve. Growth in household spending has picked up recently but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly; however, investment in nonresidential structures is declining and employers remain reluctant to add to payrolls. Housing starts have edged up but remain at a depressed level. While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability. In light of improved functioning of financial markets, the Federal Reserve has closed all but one of the special liquidity facilities that it created to support markets during the crisis. The only remaining such program, the Term Asset-Backed Securities Loan Facility, is scheduled to close on June 30 for loans backed by new-issue commercial mortgage-backed securities; it closed on March 31 for loans backed by all other types of collateral. Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh. Voting against the policy action was Thomas M. Hoenig, who believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to a build-up of future imbalances and increase risks to longer run macroeconomic and financial stability, while limiting the Committee’s flexibility to begin raising rates modestly.

2010-04-06

Minute

A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held in the offices of the Board of Governors in Washington, D.C., on Tuesday, March 16, 2010, at 8:00 a.m. PRESENT: Ben Bernanke, Chairman William C. Dudley, Vice Chairman James Bullard Elizabeth Duke Thomas M. Hoenig Donald L. Kohn Sandra Pianalto Eric Rosengren Daniel K. Tarullo Kevin Warsh Christine Cumming, Charles L. Evans, Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, Alternate Members of the Federal Open Market Committee Jeffrey M. Lacker, Dennis P. Lockhart, and Janet L. Yellen, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco, respectively Brian F. Madigan, Secretary and Economist Matthew M. Luecke, Assistant Secretary David W. Skidmore, Assistant Secretary Michelle A. Smith, Assistant Secretary Scott G. Alvarez, General Counsel Thomas C. Baxter, Deputy General Counsel Nathan Sheets, Economist David J. Stockton, Economist Thomas A. Connors, William B. English, Steven B. Kamin, Lawrence Slifman, Christopher J. Waller, and David W. Wilcox, Associate Economists Brian Sack, Manager, System Open Market Account Jennifer J. Johnson, Secretary of the Board, Office of the Secretary, Board of Governors Patrick M. Parkinson, Director, Division of Bank Supervision and Regulation, Board of Governors Robert deV. Frierson, Deputy Secretary, Office of the Secretary, Board of Governors Charles S. Struckmeyer, Deputy Staff Director, Office of the Staff Director for Management, Board of Governors James A. Clouse, Deputy Director, Division of Monetary Affairs, Board of Governors Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors Sherry Edwards and Andrew T. Levin, Senior Associate Directors, Division of Monetary Affairs, Board of Governors; David Reifschneider and William Wascher, Senior Associate Directors, Division of Research and Statistics, Board of Governors Michael G. Palumbo, Deputy Associate Director, Division of Research and Statistics, Board of Governors David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors Min Wei, Senior Economist, Division of Monetary Affairs, Board of Governors Penelope A. Beattie, Assistant to the Secretary, Office of the Secretary, Board of Governors Valerie Hinojosa and Randall A. Williams, Records Management Analysts, Division of Monetary Affairs, Board of Governors James M. Lyon, First Vice President, Federal Reserve Bank of Minneapolis Jamie J. McAndrews and Harvey Rosenblum, Executive Vice Presidents, Federal Reserve Banks of New York and Dallas, respectively David Altig, Craig S. Hakkio, Loretta J. Mester, Glenn D. Rudebusch, Mark E. Schweitzer, Daniel G. Sullivan, and John A. Weinberg, Senior Vice Presidents, Federal Reserve Banks of Atlanta, Kansas City, Philadelphia, San Francisco, Cleveland, Chicago, and Richmond, respectively Giovanni Olivei, Vice President, Federal Reserve Bank of Boston Joshua Frost, Assistant Vice President, Federal Reserve Bank of New York Jonathan Heathcote, Senior Economist, Federal Reserve Bank of Minneapolis Developments in Financial Markets and the Federal Reserve's Balance Sheet The Manager of the System Open Market Account reported on developments in domestic and foreign financial markets during the period since the Committee met on January 26-27, 2010. The net effect of these developments was that financial conditions had become modestly more supportive of economic growth. No market strains emerged in conjunction with the Federal Reserve's closing of nearly all of its remaining special liquidity facilities over the intermeeting period. On February 1, the Primary Dealer Credit Facility, the Commercial Paper Funding Facility, the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, and the Term Securities Lending Facility were closed, and the Federal Reserve's temporary currency swap lines with foreign central banks expired. Financial markets also adjusted smoothly to the final offering of funds through the Term Auction Facility on March 8. The Manager noted that securitized credit markets had not shown substantial strain from the anticipated end of new credit extensions under the Term Asset-Backed Securities Loan Facility (TALF), which was scheduled to close on June 30 for loans backed by new-issue commercial mortgage-backed securities (CMBS) and on March 31 for loans backed by all other types of collateral.1 Spreads on asset-backed securities remained tight while issuance--the bulk of which was being financed outside of TALF--continued to be fairly strong. While the cumulative volume of borrowing from the TALF had expanded fairly steadily in recent months, the volume of repayments of TALF loans had also risen as borrowers were able to secure funding from other sources on more favorable terms. As a result, the net amount of outstanding TALF credit had leveled out and would likely decline going forward as a result of continuing repayments. In his report on System open market operations, the Manager noted that over the period since the Committee had met in January, the Federal Reserve's total assets had risen to about $2.3 trillion, as an increase in the System's holdings of securities was partly offset by the declining usage of the System's credit and liquidity facilities. The Desk continued to gradually slow the pace of its purchases of agency mortgage-backed securities (MBS) and agency debt as it moved toward completing the Committee's previously announced asset purchases by the end of March. The Desk's purchases of agency MBS were on track to meet the targeted amount of $1.25 trillion, while its purchases of agency debt would likely cumulate to slightly less than $175 billion. The Desk continued to engage in dollar roll transactions in agency MBS securities to facilitate settlement of its outright purchases. There were no open market operations in foreign currencies for the System's account over the intermeeting period. By unanimous vote, the Committee ratified the Desk's transactions. Participants also agreed that the Desk should continue the interim approach of allowing all maturing agency debt and all prepayments of agency MBS to be redeemed without replacement. In addition, the Manager reported on recent progress in the development of reserve draining tools, including the initiation of a program for expanding the set of counterparties in conducting reverse repurchase agreements, and the staff gave a presentation on potential approaches for tightening the link between short-term market interest rates and the interest rate paid on reserve balances held at the Federal Reserve Banks. Secretary's note: A staff memorandum was provided to members of the Board of Governors and Federal Reserve Bank presidents summarizing public comments on last December's Federal Register notice regarding the establishment of a term deposit facility, but that topic was not discussed at this meeting. The staff also briefed the Committee on potential approaches for managing the Treasury securities held by the Federal Reserve. To date, the Desk had been reinvesting all maturing Treasury securities by exchanging those holdings for newly issued Treasury securities, but an alternative strategy would be to allow some or all of those Treasury securities to mature without reinvestment. Redeeming all of its maturing Treasury holdings would significantly reduce the size of the Federal Reserve's balance sheet over coming years and hence could be helpful in limiting the need to use other reserve draining tools such as reverse repurchase agreements and term deposits. Redemptions would also lower the interest rate sensitivity of the Federal Reserve's portfolio over time. Nevertheless, the initiation of a redemption strategy might generate upward pressure on market rates, especially if that measure led investors to move up their expected timing of policy firming. Participants agreed that the Committee would give further consideration to these matters and that in the interim the Desk should continue its current practice of reinvesting all maturing Treasury securities. Staff Review of the Economic Situation The information reviewed at the March 16 meeting suggested that economic activity expanded at a moderate pace in early 2010. Business investment in equipment and software seemed to have picked up, consumer spending increased further in January, and private employment would likely have turned up in February in the absence of the snowstorms that affected the East Coast. Output in the manufacturing sector continued to trend higher as firms increased production to meet strengthening final demand and to slow the pace of inventory liquidation. On the downside, housing activity remained flat and the nonresidential construction sector weakened further. Meanwhile, a sizable increase in energy prices pushed up headline consumer price inflation in recent months; in contrast, core consumer price inflation was quite low. Available indicators suggested that the labor market might be stabilizing. Declines in private payrolls slowed markedly in recent months, and, in the absence of the snowstorms, private employment probably would have risen in February. The average workweek for production and nonsupervisory workers fell back in February after ticking up in January; however, the drop was likely due to the storms. The unemployment rate was unchanged at 9.7 percent in February, and the labor force participation rate inched up over the past two months. However, the level of initial claims for unemployment insurance benefits remained high. After increasing briskly in the second half of 2009, industrial production (IP) continued to expand, on net, in the early months of 2010, rising sharply in January and remaining little changed in February despite some adverse effects of the snowstorms. Recent production gains remained broadly based across industries, as firms continued to boost production to meet rising domestic and foreign demand and to slow the pace of inventory liquidation. Capacity utilization in manufacturing rose further, to a level noticeably above its trough in June, but remained well below its longer-run average. As a result, incentives for manufacturing firms to expand production capacity were weak. The available indicators of near-term manufacturing activity pointed to moderate gains in IP in coming months. Consumer spending continued to move up. Although sales of new automobiles and light trucks softened slightly, on average, in January and February, real outlays for a wide variety of non-auto goods and food services increased appreciably, and real outlays for other services remained on a gradual uptrend. In contrast to the modest recovery in spending, measures of consumer sentiment remained relatively downbeat in February and had improved little, on balance, since a modest rebound last spring. Household income appeared less supportive of spending than at the January meeting, reflecting downward revisions to estimates by the Bureau of Economic Analysis of wages and salaries in the second half of 2009. The ratio of household net worth to income was little changed in the fourth quarter after two consecutive quarters of appreciable gains. Activity in the housing sector appeared to have flattened out in recent months. Sales of both new and existing homes had turned down, while starts of single-family homes were about unchanged despite the substantial reduction in inventories of unsold new homes. Some of the recent weakness in sales might have been due to transactions that had been pulled forward in anticipation of the originally scheduled expiration of the tax credit for first-time homebuyers in November 2009; nonetheless, the underlying pace of housing demand likely remained weak. The slowdown in sales notwithstanding, housing demand was being supported by low interest rates for conforming fixed-rate 30-year mortgages and reportedly by a perception that real estate values were near their trough. Real spending on equipment and software increased at a solid pace in the fourth quarter of 2009 and apparently rose further early in the first quarter of 2010. Business outlays for motor vehicles seemed to be holding up after a sharp increase in the fourth quarter, purchases of high-tech equipment appeared to be rising briskly, and incoming data pointed to some firming in outlays on other equipment. The recent gains in investment spending were consistent with improvements in many indicators of business demand. In contrast, conditions in the nonresidential construction sector generally remained poor. Real outlays on structures outside of the drilling and mining sector fell again in the fourth quarter, and nominal expenditures dropped further in January. The weakness was widespread across categories and likely reflected rising vacancy rates, falling property prices, and difficult financing conditions for new projects. However, real spending on drilling and mining structures increased strongly in response to the earlier rebound in oil and natural gas prices. The pace of inventory liquidation slowed considerably in late 2009. As measured in the national income and product accounts, real nonfarm inventories excluding motor vehicles were drawn down at a much slower pace in the fourth quarter than in each of the preceding two quarters. Available data for January indicated a further small liquidation of real stocks early this year in the manufacturing and wholesale trade sectors. The ratio of book-value inventories to sales (excluding motor vehicles and parts) edged down again in January and stood well below the recent peak recorded near the end of 2008. Inventories remained elevated for equipment, materials, and, to a lesser degree, construction supplies, while inventories of consumer goods and business supplies appeared to be low relative to demand. Although rising energy prices continued to boost overall consumer price inflation, consumer prices excluding food and energy were soft, as a wide variety of goods and services exhibited persistently low inflation or outright price declines. On a 12-month change basis, core personal consumption expenditures (PCE) price inflation slowed in January 2010 compared with a year earlier, as a marked and fairly widespread deceleration in market-based core PCE prices was partly offset by an acceleration in nonmarket prices. Survey expectations for near-term inflation were unchanged over the intermeeting period; median longer-term inflation expectations edged down to near the lower end of the narrow range that prevailed over the previous few years. With regard to labor costs, the revised data on wages and salaries showed that last year's deceleration in hourly compensation was even sharper than was evident at the January meeting. The U.S. international trade deficit widened in December but narrowed slightly in January, ending the period a little larger. Both exports and imports rose sharply in December before pulling back somewhat the following month. For the period as a whole, the rise in exports was broadly based, with notable gains in aircraft and industrial supplies. Oil and other industrial supplies accounted for much of the increase in imports over the two months, while purchases of consumer products declined. Economic performance in the advanced foreign economies was mixed in the fourth quarter, with real gross domestic product (GDP) advancing sharply in Canada and Japan but rising only slightly in the euro area and the United Kingdom. That divergence appeared to have persisted in the first quarter, as indicators pointed to continued rapid economic growth in Canada and moderate expansion in Japan but somewhat anemic growth in Europe. In the emerging market economies, rebounding global trade, inventory restocking, and increased domestic demand supported generally robust fourth-quarter growth. Continued rapid expansion in China and several other Asian economies offset slowdowns elsewhere in the region. In Latin America, Mexican activity was buoyed by rising manufacturing and exports to the United States, while Brazil's economy again grew briskly. Headline consumer price inflation picked up around the world over the past two months, principally reflecting increases in food and energy prices. Excluding food and energy, consumer prices were generally more subdued. Staff Review of the Financial Situation The decision by the Federal Open Market Committee (FOMC) at the January meeting to keep the target range for the federal funds rate unchanged and to retain the "extended period" language in the statement was widely anticipated by market participants. However, investors reportedly read the statement's characterization of the economic outlook as somewhat more upbeat than they had anticipated, and Eurodollar futures rates rose a bit in response. The changes to the terms for primary credit and the Term Auction Facility that were announced on February 18 resulted in a small increase in near-term futures rates, but this reaction proved short lived, as the statement and subsequent Federal Reserve communications--including the Chairman's semiannual congressional testimony--emphasized that the modifications were technical adjustments and did not signal any near-term shifts in the overall stance of monetary policy. On balance, incoming economic data led investors to mark down the expected path of the federal funds rate over the intermeeting period. By contrast, yields on 2-year and 10-year nominal Treasury securities edged up, on net, over the period. Yields on Treasury inflation-protected securities (TIPS) rose at all maturities, reportedly buoyed by investor anticipation of heavier TIPS issuance and by reduced demand for TIPS by retail investors. Reflecting these developments, inflation compensation--the difference between nominal yields and TIPS yields for a given term to maturity--declined over the period, a move that was supported by the somewhat weaker-than-expected economic data and the publication of lower-than-expected readings on consumer prices. Conditions in short-term funding markets remained generally stable over the intermeeting period. Spreads between London interbank offered rates (Libor) and overnight index swap (OIS) rates at one- and three-month maturities stayed low, while six-month spreads edged down somewhat further. Spreads of rates on A2/P2-rated commercial paper and on AA-rated asset-backed commercial paper over the AA nonfinancial rate were also little changed at low levels. The Federal Reserve continued to taper its large-scale asset purchases and wind down the emergency lending facilities with no apparent adverse effects on financial markets or institutions. Broad stock price indexes rose, on net, over the intermeeting period, boosted in part by favorable earnings reports from the retail sector. Bank equity prices outperformed the broader equity markets. Option-implied volatility on the S&P 500 index dropped back to post-crisis lows after increasing earlier in the period on concerns about Chinese monetary policy tightening and fiscal strains in Europe. Nonetheless, the gap between the staff's estimate of the expected real equity return over the next 10 years for S&P 500 firms and the real 10-year Treasury yield--a rough measure of the equity risk premium--remained well above its average over the past decade. Yields on investment-grade corporate bonds, as well as their spreads over yields on comparable-maturity Treasury securities, were about unchanged over the intermeeting period; investment-grade risk spreads were near the levels that prevailed late in 2007. Yields and spreads on speculative-grade bonds edged down, and secondary-market prices of leveraged loans rose further. Overall, net debt financing by nonfinancial firms was about zero over the first two months of 2010, consistent with firms' weak demand for credit and banks' tight credit policies. Gross public equity issuance by nonfinancial firms was robust in the fourth quarter of 2009. Since the turn of the year, gross public equity issuance by nonfinancial firms slowed somewhat, while announcements of both new share repurchase programs and cash-financed mergers and acquisitions picked up. Public equity issuance by financial firms declined in January and February following very strong issuance in December, when several large banks issued equity to facilitate the repayment of capital received under the Troubled Asset Relief Program. Gross bond issuance by financial firms remained solid. The contraction in commercial mortgage debt accelerated in the fourth quarter. The dollar value of commercial real estate sales remained very low in February, and the share of properties sold at a nominal loss inched higher. The delinquency rate on commercial mortgages in securitized pools increased in January, and the delinquency rate on commercial mortgages at commercial banks rose in the fourth quarter. The percentage of delinquent construction loans at banks also ticked higher in the fourth quarter. Nonetheless, indexes of commercial mortgage credit default swaps changed little, on balance, over the intermeeting period. Since the January meeting, yields and spreads on agency MBS were little changed despite the continued tapering of the Federal Reserve's purchases of these securities, and residential mortgage interest rates and spreads were roughly flat. Net issuance of MBS by Fannie Mae and Freddie Mac remained subdued through the end of January. Consumer credit expanded in January, its first increase since January 2009. Despite low and stable spreads on consumer asset-backed securities (ABS), the amount of ABS issued in the first two months of the year was somewhat below that in the fourth quarter, reflecting the very weak pace of consumer credit originations late last year. The spread of credit card interest rates over two-year Treasury yields ticked up in January, while spreads on new auto loans declined slightly, on net, over the intermeeting period. Delinquency rates on credit card loans in securitized pools and on auto loans at captive finance companies remained elevated in January but were down a bit from their recent peaks. Total bank credit contracted substantially in January and February. Banks' securities holdings declined at a modest pace after several months of steady growth, and total loans on banks' books continued to drop. Commercial and industrial (C&I) loans continued falling, as spreads of interest rates on C&I loans over comparable-maturity market instruments climbed further in the first quarter and nonfinancial firms' need for external finance apparently remained subdued. Commercial real estate loans also posted significant declines. Household loans on banks' books contracted as well, in part because of a pickup in bank securitizations of first-lien residential mortgages with the government-sponsored enterprises in February. Consumer loans originated by banks declined, primarily reflecting a large drop in credit card loans. In contrast, other consumer loans--including auto, student, and tax advance loans--were roughly flat during January and February. M2 decreased in January, owing partly to a contraction in liquid deposits. Many institutions opted out of the Federal Deposit Insurance Corporation's Transaction Account Guarantee Program because of the higher fees associated with participation after year-end, reportedly driving depositors to transfer funds out of transaction accounts and into alternative investments outside of M2. M2 expanded in February, however, as liquid deposits resumed their growth. Small time deposits and retail money market mutual funds contracted in January and, to a lesser extent, in February, while currency declined a bit in January but advanced notably in February. The monetary base rose in both months, as the increase in reserve balances resulting from the ongoing large-scale asset purchases by the Federal Reserve more than offset the contraction in balances associated with the decline in credit outstanding under the System's liquidity and credit facilities. Movements in foreign financial markets since the January meeting were importantly influenced by concerns over fiscal problems in Greece. Spreads on Greek government debt relative to German bunds widened appreciably before falling back as press reports indicated that euro-area countries were discussing a possible aid package for Greece and the Greek government announced further deficit reduction measures. Spreads on debt issued by several other European countries followed a similar pattern over the intermeeting period. The Bank of England (BOE) and the European Central Bank (ECB) held rates steady during the period, and the BOE elected not to expand its Asset Purchase Facility, which reached its limit at the end of January. In early March, the ECB announced several steps to normalize its provision of liquidity. Equity prices in most foreign countries were up moderately since the January FOMC meeting. Likely reflecting the concerns about Greece as well as weak economic data in Europe, the dollar appreciated notably against sterling and the euro over the intermeeting period. However, the dollar declined against most emerging market currencies, which were buoyed by brightening growth prospects, leaving the broad trade-weighted value of the dollar down a bit since the January meeting. Staff Economic Outlook In the forecast prepared for the March FOMC meeting, the staff's outlook for real economic activity was broadly similar to that at the time of the January meeting. In particular, the staff continued to anticipate a moderate pace of economic recovery over the next two years, reflecting the accommodative stance of monetary policy and a further diminution of the factors that had weighed on spending and production since the onset of the financial crisis. The staff did make modest downward adjustments to its projections for real GDP growth in response to unfavorable news on housing activity, unexpectedly weak spending by state and local governments, and a substantial reduction in the estimated level of household income in the second half of 2009. The staff's forecast for the unemployment rate at the end of 2011 was about the same as in its previous projection. Recent data on consumer prices and unit labor costs led the staff to revise down slightly its projection for core PCE price inflation for 2010 and 2011; as before, core inflation was projected to be quite subdued at rates below last year's pace. Although increased oil prices had boosted overall inflation over recent months, the staff anticipated that consumer prices for energy would increase more slowly going forward, consistent with quotes on oil futures contracts. Consequently, total PCE price inflation was projected to run a little above core inflation this year and then edge down to the same rate as core inflation in 2011. Participants' Views on Current Conditions and the Economic Outlook In their discussion of the economic situation and outlook, participants agreed that economic activity continued to strengthen and that the labor market appeared to be stabilizing. Incoming information on economic activity received over the intermeeting period was somewhat mixed but generally confirmed that the economic recovery was likely to proceed at a moderate pace. On the positive side, recent data pointed to significant gains in retail sales, a substantial pickup in business spending on equipment and software, and a further expansion of goods exports. Moreover, the latest labor market readings had been mildly encouraging, with a considerable increase in temporary employment, especially in the manufacturing and information technology sectors. However, housing starts had remained flat at a depressed level, investment in nonresidential structures was still declining, and state and local government expenditures were being depressed by lower revenues. Moreover, consumer sentiment continued to be damped by very weak labor market conditions, and firms remained reluctant to add to payrolls or to commit to new capital projects. Participants saw recent inflation readings as suggesting a slightly greater deceleration in consumer prices than had been expected. In light of stable longer-term inflation expectations and the likely continuation of substantial resource slack, they generally anticipated that inflation would be subdued for some time. Participants agreed that financial market conditions remained supportive of economic growth. Spreads in short-term funding markets were near pre-crisis levels, and risk spreads on corporate bonds and measures of implied volatility in equity markets were broadly consistent with historical norms given the outlook for the economy. Participants were also reassured by the absence of any signs of renewed strains in financial market functioning as a consequence of the Federal Reserve's winding down of its special liquidity facilities. In contrast, bank lending was still contracting and interest rates on many bank loans had risen further in recent months. Participants anticipated that credit conditions would gradually improve over time, and they noted the possibility of a beneficial feedback loop in which the economic recovery would contribute to stronger bank balance sheets and so to an increased availability of credit to households and small businesses, which would in turn help boost the economy further. While participants saw incoming information as broadly consistent with continued strengthening of economic activity, they also highlighted a variety of factors that would be likely to restrain the overall pace of recovery, especially in light of the waning effects of fiscal stimulus and inventory rebalancing over coming quarters. While recent data pointed to a noticeable pickup in the pace of consumer spending during the first quarter, participants agreed that household spending going forward was likely to remain constrained by weak labor market conditions, lower housing wealth, tight credit, and modest income growth. For example, real disposable personal income in January was virtually unchanged from a year earlier and would have been even lower in the absence of a substantial rise in federal transfer payments to households. Business spending on equipment and software picked up substantially over recent months, but anecdotal information suggested that this pickup was driven mainly by increased spending on maintaining existing capital and updating technology rather than expanding capacity. The continued gains in manufacturing production were bolstered by growing demand from foreign trading partners, especially emerging market economies. However, a few participants noted the possibility that fiscal retrenchment in some foreign countries could trigger a slowdown of those economies and hence weigh on the demand for U.S. exports. Some labor market indicators displayed positive signals over the intermeeting period, including a pickup in temporary employment and increased job postings. Indeed, nonfarm payrolls might well have increased in February in the absence of weather disruptions. Nevertheless, participants were concerned about the scarcity of job openings, the elevated level of unemployment, and the extent of longer-term unemployment, which was seen as potentially leading to the loss of worker skills. Moreover, the downward trend in initial unemployment insurance claims appeared to have leveled off in recent weeks, while hiring remained at historically low rates. Information from business contacts and evidence from regional surveys generally underscored the degree to which firms' reluctance to add to payrolls or start large capital projects reflected their concerns about the economic outlook and uncertainty regarding future government policies. A number of participants pointed out that the economic recovery could not be sustained over time without a substantial pickup in job creation, which they still anticipated but had not yet become evident in the data. Participants were also concerned that activity in the housing sector appeared to be leveling off in most regions despite various forms of government support, and they noted that commercial and industrial real estate markets continued to weaken. Indeed, housing sales and starts had flattened out at depressed levels, suggesting that previous improvements in those indicators may have largely reflected transitory effects from the first-time homebuyer tax credit rather than a fundamental strengthening of housing activity. Participants indicated that the pace of foreclosures was likely to remain quite high; indeed, recent data on the incidence of seriously delinquent mortgages pointed to the possibility that the foreclosure rate could move higher over coming quarters. Moreover, the prospect of further additions to the already very large inventory of vacant homes posed downside risks to home prices. Participants referred to a wide array of evidence as indicating that underlying inflation trends remained subdued. The latest readings on core inflation--which exclude the relatively volatile prices of food and energy--were generally lower than they had anticipated, and with petroleum prices having leveled out, headline inflation was likely to come down to a rate close to that of core inflation over coming months. While the ongoing decline in the implicit rental cost for owner-occupied housing was weighing on core inflation, a number of participants observed that the moderation in price changes was widespread across many categories of spending. This moderation was evident in the appreciable slowing of inflation measures such as trimmed means and medians, which exclude the most extreme price movements in each period. In discussing the inflation outlook, participants took note of signs that inflation expectations were reasonably well anchored, and most agreed that substantial resource slack was continuing to restrain cost pressures. Measures of gains in nominal compensation had slowed, and sharp increases in productivity had pushed down producers' unit labor costs. Anecdotal information indicated that planned wage increases were small or nonexistent and suggested that large margins of underutilized capital and labor and a highly competitive pricing environment were exerting considerable downward pressure on price adjustments. Survey readings and financial market data pointed to a modest decline in longer-term inflation expectations over recent months. While all participants anticipated that inflation would be subdued over the near term, a few noted that the risks to inflation expectations and the medium-term inflation outlook might be tilted to the upside in light of the large fiscal deficits and the extraordinarily accommodative stance of monetary policy. Committee Policy Action In their discussion of monetary policy for the period ahead, members agreed that it would be appropriate to maintain the target range of 0 to 1/4 percent for the federal funds rate and to complete the Committee's previously announced purchases of $1.25 trillion of agency MBS and about $175 billion of agency debt by the end of March. Nearly all members judged that it was appropriate to reiterate the expectation that economic conditions--including low levels of resource utilization, subdued inflation trends, and stable inflation expectations--were likely to warrant exceptionally low levels of the federal funds rate for an extended period, but one member believed that communicating such an expectation would create conditions that could lead to financial imbalances. A number of members noted that the Committee's expectation for policy was explicitly contingent on the evolution of the economy rather than on the passage of any fixed amount of calendar time. Consequently, such forward guidance would not limit the Committee's ability to commence monetary policy tightening promptly if evidence suggested that economic activity was accelerating markedly or underlying inflation was rising notably; conversely, the duration of the extended period prior to policy firming might last for quite some time and could even increase if the economic outlook worsened appreciably or if trend inflation appeared to be declining further. A few members also noted that at the current juncture the risks of an early start to policy tightening exceeded those associated with a later start, because the Committee could be flexible in adjusting the magnitude and pace of tightening in response to evolving economic circumstances; in contrast, its capacity for providing further stimulus through conventional monetary policy easing continued to be constrained by the effective lower bound on the federal funds rate. Members noted the importance of continued close monitoring of financial markets and institutions--including asset prices, levels of leverage, and underwriting standards--to help identify significant financial imbalances at an early stage. At the time of the meeting the information collected in this process, including that by supervisory staff, had not revealed emerging misalignments in financial markets or widespread instances of excessive risk-taking. All members agreed that the Committee would continue to monitor the economic outlook and financial developments and would employ its policy tools as necessary to promote economic recovery and price stability. In light of the improved functioning of financial markets, Committee members agreed that it would be appropriate for the statement to be released following the meeting to indicate that the previously announced schedule for closing the Term Asset-Backed Securities Loan Facility was being maintained. The Committee also discussed possible approaches for formulating and communicating key elements of its strategy for removing extraordinary monetary policy accommodation at the appropriate time. No decisions about the Committee's exit strategy were made at this meeting, but participants agreed to give further consideration to these issues at a later date. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to complete the execution of its purchases of about $1.25 trillion of agency MBS and of about $175 billion in housing-related agency debt by the end of March. The Committee directs the Desk to engage in dollar roll transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability." The vote encompassed approval of the statement below to be released at 2:15 p.m.: "Information received since the Federal Open Market Committee met in January suggests that economic activity has continued to strengthen and that the labor market is stabilizing. Household spending is expanding at a moderate rate but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly. However, investment in nonresidential structures is declining, housing starts have been flat at a depressed level, and employers remain reluctant to add to payrolls. While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve has been purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt; those purchases are nearing completion, and the remaining transactions will be executed by the end of this month. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability. In light of improved functioning of financial markets, the Federal Reserve has been closing the special liquidity facilities that it created to support markets during the crisis. The only remaining such program, the Term Asset-Backed Securities Loan Facility, is scheduled to close on June 30 for loans backed by new-issue commercial mortgage-backed securities and on March 31 for loans backed by all other types of collateral." Voting for this action: Ben Bernanke, William C. Dudley, James Bullard, Elizabeth Duke, Donald L. Kohn, Sandra Pianalto, Eric Rosengren, Daniel K. Tarullo, and Kevin Warsh. Voting against this action: Thomas M. Hoenig. Mr. Hoenig dissented because he believed it was no longer advisable to indicate that economic and financial conditions were likely to warrant "exceptionally low levels of the federal funds rate for an extended period." Mr. Hoenig was concerned that communicating such an expectation could lead to the buildup of future financial imbalances and increase the risks to longer-run macroeconomic and financial stability. Accordingly, Mr. Hoenig believed that it would be more appropriate for the Committee to express its anticipation that economic conditions were likely to warrant "a low level of the federal funds rate for some time." Such a change in communication would provide the Committee flexibility to begin raising rates modestly. He further believed that making such an adjustment to the Committee's target for the federal funds rate sooner rather than later would reduce longer-run risks to macroeconomic and financial stability while continuing to provide needed support to the economic recovery. It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, April 27-28, 2010. The meeting adjourned at 1:00 p.m. on March 16, 2010. Notation Vote By notation vote completed on February 16, 2010, the Committee unanimously approved the minutes of the FOMC meeting held on January 26-27, 2010.   _____________________________ Brian F. Madigan Secretary  1. The final non-CMBS subscription had already occurred in early March and the final subscription for legacy CMBS would take place soon after the FOMC meeting; subscriptions for new-issue CMBS would continue through June. Return to text Return to top

2010-03-16

Statement

Information received since the Federal Open Market Committee met in January suggests that economic activity has continued to strengthen and that the labor market is stabilizing. Household spending is expanding at a moderate rate but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly. However, investment in nonresidential structures is declining, housing starts have been flat at a depressed level, and employers remain reluctant to add to payrolls. While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve has been purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt; those purchases are nearing completion, and the remaining transactions will be executed by the end of this month. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability. In light of improved functioning of financial markets, the Federal Reserve has been closing the special liquidity facilities that it created to support markets during the crisis. The only remaining such program, the Term Asset-Backed Securities Loan Facility, is scheduled to close on June 30 for loans backed by new-issue commercial mortgage-backed securities and on March 31 for loans backed by all other types of collateral. Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh. Voting against the policy action was Thomas M. Hoenig, who believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to the buildup of financial imbalances and increase risks to longer-run macroeconomic and financial stability.

2010-02-17

Minute

A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held in the offices of the Board of Governors in Washington, D.C., on Tuesday, January 26, 2010, at 2:00 p.m. and continued on Wednesday, January 27, 2010, at 8:30 a.m. PRESENT: Ben Bernanke, Chairman William C. Dudley, Vice Chairman James Bullard Elizabeth Duke Thomas M. Hoenig Donald L. Kohn Sandra Pianalto Eric Rosengren Daniel K. Tarullo Kevin Warsh Christine Cumming, Charles L. Evans, Richard Fisher, Narayana Kocherlakota, and Charles I. Plosser, Alternate Members of the Federal Open Market Committee Jeffrey M. Lacker, Dennis P. Lockhart, and Janet L. Yellen, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco, respectively Brian F. Madigan, Secretary and Economist Matthew M. Luecke, Assistant Secretary David W. Skidmore, Assistant Secretary Michelle A. Smith, Assistant Secretary Scott G. Alvarez, General Counsel Nathan Sheets, Economist David J. Stockton, Economist Alan D. Barkema, Thomas A. Connors, William B. English, Jeff Fuhrer, Steven B. Kamin, Simon Potter, Lawrence Slifman, Mark S. Sniderman, Christopher J. Waller, and David W. Wilcox, Associate Economists Brian Sack, Manager, System Open Market Account Jennifer J. Johnson, Secretary of the Board, Office of the Secretary, Board of Governors Patrick M. Parkinson, Director, Division of Bank Supervision and Regulation, Board of Governors Robert deV. Frierson,1 Deputy Secretary, Office of the Secretary, Board of Governors Charles S. Struckmeyer, Deputy Staff Director, Office of the Staff Director for Management, Board of Governors James A. Clouse, Deputy Director, Division of Monetary Affairs, Board of Governors Linda Robertson,2 Assistant to the Board, Office of Board Members, Board of Governors Sherry Edwards, Andrew T. Levin, and William R. Nelson, Senior Associate Directors, Division of Monetary Affairs, Board of Governors; David Reifschneider and William Wascher, Senior Associate Directors, Division of Research and Statistics, Board of Governors Stephen A. Meyer, Senior Adviser, Division of Monetary Affairs, Board of Governors; Stephen D. Oliner, Senior Adviser, Division of Research and Statistics, Board of Governors Michael Leahy, Associate Director, Division of International Finance, Board of Governors; Daniel E. Sichel, Associate Director, Division of Research and Statistics, Board of Governors Michael G. Palumbo, Deputy Associate Director, Division of Research and Statistics, Board of Governors; Egon Zakrajsek, Deputy Associate Director, Division of Monetary Affairs, Board of Governors David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors Carol C. Bertaut, Senior Economist, Division of International Finance, Board of Governors; Louise Sheiner, Senior Economist, Division of Research and Statistics, Board of Governors Mark A. Carlson and Kurt F. Lewis, Economists, Division of Monetary Affairs, Board of Governors Penelope A. Beattie, Assistant to the Secretary, Office of the Secretary, Board of Governors Carol Low, Open Market Secretariat Specialist, Division of Monetary Affairs, Board of Governors Randall A. Williams, Records Management Analyst, Division of Monetary Affairs, Board of Governors Harvey Rosenblum, Executive Vice President, Federal Reserve Bank of Dallas David Altig, Spence Hilton, Loretta J. Mester, and Glenn D. Rudebusch, Senior Vice Presidents, Federal Reserve Banks of Atlanta, New York, Philadelphia, and San Francisco, respectively Warren Weber, Senior Research Officer, Federal Reserve Bank of Minneapolis David C. Wheelock, Vice President, Federal Reserve Bank of St. Louis Julie Ann Remache, Assistant Vice President, Federal Reserve Bank of New York Hesna Genay, Economic Advisor, Federal Reserve Bank of Chicago Robert L. Hetzel, Senior Economist, Federal Reserve Bank of Richmond Annual Organizational Matters In the agenda for this meeting, it was reported that advices of the election of the following members and alternate members of the Federal Open Market Committee for a term beginning January 26, 2010, had been received and that these individuals had executed their oaths of office. The elected members and alternate members were as follows: William C. Dudley, President of the Federal Reserve Bank of New York, with Christine Cumming, First Vice President of the Federal Reserve Bank of New York, as alternate. Eric Rosengren, President of the Federal Reserve Bank of Boston, with Charles I. Plosser, President of the Federal Reserve Bank of Philadelphia, as alternate. Sandra Pianalto, President of the Federal Reserve Bank of Cleveland, with Charles L. Evans, President of the Federal Reserve Bank of Chicago, as alternate. James Bullard, President of the Federal Reserve Bank of St. Louis, with Richard Fisher, President of the Federal Reserve Bank of Dallas, as alternate. Thomas M. Hoenig, President of the Federal Reserve Bank of Kansas City, with Narayana Kocherlakota, President of the Federal Reserve Bank of Minneapolis, as alternate. By unanimous vote, the following officers of the Federal Open Market Committee were selected to serve until the selection of their successors at the first regularly scheduled meeting of the Committee in 2011, with the understanding that in the event of the discontinuance of their official connection with the Board of Governors or with a Federal Reserve Bank, they would cease to have any official connection with the Federal Open Market Committee: Ben Bernanke Chairman William C. Dudley Vice Chairman Brian F. Madigan Secretary and Economist Matthew M. Luecke Assistant Secretary David W. Skidmore Assistant Secretary Michelle A. Smith Assistant Secretary Scott G. Alvarez General Counsel Thomas Baxter Deputy General Counsel Richard M. Ashton Assistant General Counsel Nathan Sheets Economist David J. Stockton Economist Alan D. Barkema Thomas A. Connors William B. English Jeff Fuhrer Steven B. Kamin Simon Potter Lawrence Slifman Mark S. Sniderman Christopher J. Waller David W. Wilcox Associate Economists By unanimous vote, the Committee amended its Program for Security of FOMC Information with the addition of a summary of the rule that governs noncitizen access to FOMC information. By unanimous vote, the Federal Reserve Bank of New York was selected to execute transactions for the System Open Market Account. By unanimous vote, Brian Sack was selected to serve at the pleasure of the Committee as Manager, System Open Market Account, with the understanding that his selection was subject to being satisfactory to the Federal Reserve Bank of New York. In his annual review of the Committee's authorizations for domestic open market operations and foreign currency transactions, the Manager noted that the Desk recommended continuing to use dollar roll transactions in the process of settling agency mortgage-backed securities (MBS) purchases, and that staff proposed adding a sentence to the directive to authorize using dollar roll transactions after March 31 for the purpose of settling MBS purchases executed by that date. He also noted that the Desk intended to conduct reverse repurchase agreements (RRPs) over the course of the coming year to ensure the readiness of the Federal Reserve's tools for absorbing bank reserves. Such transactions were authorized by the Committee's resolution of November 24, 2009. Finally, he indicated that the Desk was developing the capability to conduct agency MBS administration, trading, and settlement using internal resources, but it would continue to use agents to conduct these tasks until that capability was fully developed. By unanimous vote, the Committee approved the Authorization for Domestic Open Market Operations (shown below) with amendments to paragraph 4 that allow the use of "securities that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the United States" in temporary short-term investment transactions with foreign and international accounts and fiscal agency accounts. The Guidelines for the Conduct of System Open Market Operations in Federal-Agency Issues remained suspended. AUTHORIZATION FOR DOMESTIC OPEN MARKET OPERATIONS (Amended January 26, 2010) 1. The Federal Open Market Committee authorizes and directs the Federal Reserve Bank of New York, to the extent necessary to carry out the most recent domestic policy directive adopted at a meeting of the Committee: A. To buy or sell U.S. government securities, including securities of the Federal Financing Bank, and securities that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the United States in the open market, from or to securities dealers and foreign and international accounts maintained at the Federal Reserve Bank of New York, on a cash, regular, or deferred delivery basis, for the System Open Market Account at market prices, and, for such Account, to exchange maturing U.S. government and federal agency securities with the Treasury or the individual agencies or to allow them to mature without replacement; and B. To buy or sell in the open market U.S. government securities, and securities that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the United States, for the System Open Market Account under agreements to resell or repurchase such securities or obligations (including such transactions as are commonly referred to as repo and reverse repo transactions) in 65 business days or less, at rates that, unless otherwise expressly authorized by the Committee, shall be determined by competitive bidding, after applying reasonable limitations on the volume of agreements with individual counterparties. 2. In order to ensure the effective conduct of open market operations, the Federal Open Market Committee authorizes the Federal Reserve Bank of New York to use agents in agency MBS-related transactions. 3. In order to ensure the effective conduct of open market operations, the Federal Open Market Committee authorizes the Federal Reserve Bank of New York to lend on an overnight basis U.S. government securities and securities that are direct obligations of any agency of the United States, held in the System Open Market Account, to dealers at rates that shall be determined by competitive bidding. The Federal Reserve Bank of New York shall set a minimum lending fee consistent with the objectives of the program and apply reasonable limitations on the total amount of a specific issue that may be auctioned and on the amount of securities that each dealer may borrow. The Federal Reserve Bank of New York may reject bids that could facilitate a dealer's ability to control a single issue as determined solely by the Federal Reserve Bank of New York. 4. In order to ensure the effective conduct of open market operations, while assisting in the provision of short-term investments for foreign and international accounts maintained at the Federal Reserve Bank of New York and accounts maintained at the Federal Reserve Bank of New York as fiscal agent of the United States pursuant to section 15 of the Federal Reserve Act, the Federal Open Market Committee authorizes and directs the Federal Reserve Bank of New York: A. For the System Open Market Account, to sell U.S. government securities, and securities that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the United States, to such accounts on the bases set forth in paragraph 1.A under agreements providing for the resale by such accounts of those securities in 65 business days or less on terms comparable to those available on such transactions in the market; and B. For the New York Bank account, when appropriate, to undertake with dealers, subject to the conditions imposed on purchases and sales of securities in paragraph l.B, repurchase agreements in U.S. government securities, and securities that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the United States, and to arrange corresponding sale and repurchase agreements between its own account and such foreign, international, and fiscal agency accounts maintained at the Bank. Transactions undertaken with such accounts under the provisions of this paragraph may provide for a service fee when appropriate. 5. In the execution of the Committee's decision regarding policy during any intermeeting period, the Committee authorizes and directs the Federal Reserve Bank of New York, upon the instruction of the Chairman of the Committee, to adjust somewhat in exceptional circumstances the degree of pressure on reserve positions and hence the intended federal funds rate and to take actions that result in material changes in the composition and size of the assets in the System Open Market Account other than those anticipated by the Committee at its most recent meeting. Any such adjustment shall be made in the context of the Committee's discussion and decision at its most recent meeting and the Committee's long-run objectives for price stability and sustainable economic growth, and shall be based on economic, financial, and monetary developments during the intermeeting period. Consistent with Committee practice, the Chairman, if feasible, will consult with the Committee before making any adjustment. By unanimous vote, the Authorization for Foreign Currency Operations, the Foreign Currency Directive, and the Procedural Instructions with Respect to Foreign Currency Operations were reaffirmed in the form shown below. The vote to reaffirm these documents included approval of the System's warehousing agreement with the U.S. Treasury. AUTHORIZATION FOR FOREIGN CURRENCY OPERATIONS (Reaffirmed January 26, 2010) 1. The Federal Open Market Committee authorizes and directs the Federal Reserve Bank of New York, for the System Open Market Account, to the extent necessary to carry out the Committee's foreign currency directive and express authorizations by the Committee pursuant thereto, and in conformity with such procedural instructions as the Committee may issue from time to time: A. To purchase and sell the following foreign currencies in the form of cable transfers through spot or forward transactions on the open market at home and abroad, including transactions with the U.S. Treasury, with the U.S. Exchange Stabilization Fund established by section 10 of the Gold Reserve Act of 1934, with foreign monetary authorities, with the Bank for International Settlements, and with other international financial institutions: Australian dollars Brazilian reais Canadian dollars Danish kroner euro Japanese yen Korean won Mexican pesos New Zealand dollars Norwegian kroner Pounds sterling Singapore dollars Swedish kronor Swiss francs B. To hold balances of, and to have outstanding forward contracts to receive or to deliver, the foreign currencies listed in paragraph A above. C. To draw foreign currencies and to permit foreign banks to draw dollars under the reciprocal currency arrangements listed in paragraph 2 below, provided that drawings by either party to any such arrangement shall be fully liquidated within 12 months after any amount outstanding at that time was first drawn, unless the Committee, because of exceptional circumstances, specifically authorizes a delay. D. To maintain an overall open position in all foreign currencies not exceeding $25.0 billion. For this purpose, the overall open position in all foreign currencies is defined as the sum (disregarding signs) of net positions in individual currencies, excluding changes in dollar value due to foreign exchange rate movements and interest accruals. The net position in a single foreign currency is defined as holdings of balances in that currency, plus outstanding contracts for future receipt, minus outstanding contracts for future delivery of that currency, i.e., as the sum of these elements with due regard to sign. 2. The Federal Open Market Committee directs the Federal Reserve Bank of New York to maintain reciprocal currency arrangements ("swap" arrangements) for the System Open Market Account for periods up to a maximum of 12 months with the following foreign banks, which are among those designated by the Board of Governors of the Federal Reserve System under section 214.5 of Regulation N, Relations with Foreign Banks and Bankers, and with the approval of the Committee to renew such arrangements on maturity: Foreign bank Amount of arrangement (millions of dollars equivalent) Bank of Canada 2,000 Bank of Mexico 3,000 Any changes in the terms of existing swap arrangements, and the proposed terms of any new arrangements that may be authorized, shall be referred for review and approval to the Committee. 3. All transactions in foreign currencies undertaken under paragraph 1.A above shall, unless otherwise expressly authorized by the Committee, be at prevailing market rates. For the purpose of providing an investment return on System holdings of foreign currencies or for the purpose of adjusting interest rates paid or received in connection with swap drawings, transactions with foreign central banks may be undertaken at nonmarket exchange rates. 4. It shall be the normal practice to arrange with foreign central banks for the coordination of foreign currency transactions. In making operating arrangements with foreign central banks on System holdings of foreign currencies, the Federal Reserve Bank of New York shall not commit itself to maintain any specific balance, unless authorized by the Federal Open Market Committee. Any agreements or understandings concerning the administration of the accounts maintained by the Federal Reserve Bank of New York with the foreign banks designated by the Board of Governors under section 214.5 of Regulation N shall be referred for review and approval to the Committee. 5. Foreign currency holdings shall be invested to ensure that adequate liquidity is maintained to meet anticipated needs and so that each currency portfolio shall generally have an average duration of no more than 18 months (calculated as Macaulay duration). Such investments may include buying or selling outright obligations of, or fully guaranteed as to principal and interest by, a foreign government or agency thereof; buying such securities under agreements for repurchase of such securities; selling such securities under agreements for the resale of such securities; and holding various time and other deposit accounts at foreign institutions. In addition, when appropriate in connection with arrangements to provide investment facilities for foreign currency holdings, U.S. government securities may be purchased from foreign central banks under agreements for repurchase of such securities within 30 calendar days. 6. All operations undertaken pursuant to the preceding paragraphs shall be reported promptly to the Foreign Currency Subcommittee and the Committee. The Foreign Currency Subcommittee consists of the Chairman and Vice Chairman of the Committee, the Vice Chairman of the Board of Governors, and such other member of the Board as the Chairman may designate (or in the absence of members of the Board serving on the Subcommittee, other Board members designated by the Chairman as alternates, and in the absence of the Vice Chairman of the Committee, the Vice Chairman's alternate). Meetings of the Subcommittee shall be called at the request of any member, or at the request of the Manager, System Open Market Account ("Manager"), for the purposes of reviewing recent or contemplated operations and of consulting with the Manager on other matters relating to the Manager's responsibilities. At the request of any member of the Subcommittee, questions arising from such reviews and consultations shall be referred for determination to the Federal Open Market Committee. 7. The Chairman is authorized: A. With the approval of the Committee, to enter into any needed agreement or understanding with the Secretary of the Treasury about the division of responsibility for foreign currency operations between the System and the Treasury; B. To keep the Secretary of the Treasury fully advised concerning System foreign currency operations, and to consult with the Secretary on policy matters relating to foreign currency operations; C. From time to time, to transmit appropriate reports and information to the National Advisory Council on International Monetary and Financial Policies. 8. Staff officers of the Committee are authorized to transmit pertinent information on System foreign currency operations to appropriate officials of the Treasury Department. 9. All Federal Reserve Banks shall participate in the foreign currency operations for System Account in accordance with paragraph 3G(1) of the Board of Governors' Statement of Procedure with Respect to Foreign Relationships of Federal Reserve Banks dated January 1, 1944. FOREIGN CURRENCY DIRECTIVE (Reaffirmed January 26, 2010) 1. System operations in foreign currencies shall generally be directed at countering disorderly market conditions, provided that market exchange rates for the U.S. dollar reflect actions and behavior consistent with IMF Article IV, Section 1. 2. To achieve this end the System shall: A. Undertake spot and forward purchases and sales of foreign exchange. B. Maintain reciprocal currency ("swap") arrangements with selected foreign central banks. C. Cooperate in other respects with central banks of other countries and with international monetary institutions. 3. Transactions may also be undertaken: A. To adjust System balances in light of probable future needs for currencies. B. To provide means for meeting System and Treasury commitments in particular currencies, and to facilitate operations of the Exchange Stabilization Fund. C. For such other purposes as may be expressly authorized by the Committee. 4. System foreign currency operations shall be conducted: A. In close and continuous consultation and cooperation with the United States Treasury; B. In cooperation, as appropriate, with foreign monetary authorities; and C. In a manner consistent with the obligations of the United States in the International Monetary Fund regarding exchange arrangements under IMF Article IV. PROCEDURAL INSTRUCTIONS WITH RESPECT TO FOREIGN CURRENCY OPERATIONS (Reaffirmed January 26, 2010) In conducting operations pursuant to the authorization and direction of the Federal Open Market Committee as set forth in the Authorization for Foreign Currency Operations and the Foreign Currency Directive, the Federal Reserve Bank of New York, through the Manager, System Open Market Account ("Manager"), shall be guided by the following procedural understandings with respect to consultations and clearances with the Committee, the Foreign Currency Subcommittee, and the Chairman of the Committee, unless otherwise directed by the Committee. All operations undertaken pursuant to such clearances shall be reported promptly to the Committee. 1. The Manager shall clear with the Subcommittee (or with the Chairman, if the Chairman believes that consultation with the Subcommittee is not feasible in the time available): A. Any operation that would result in a change in the System's overall open position in foreign currencies exceeding $300 million on any day or $600 million since the most recent regular meeting of the Committee. B. Any operation that would result in a change on any day in the System's net position in a single foreign currency exceeding $150 million, or $300 million when the operation is associated with repayment of swap drawings. C. Any operation that might generate a substantial volume of trading in a particular currency by the System, even though the change in the System's net position in that currency might be less than the limits specified in 1.B. D. Any swap drawing proposed by a foreign bank not exceeding the larger of (i) $200 million or (ii) 15 percent of the size of the swap arrangement. 2. The Manager shall clear with the Committee (or with the Subcommittee, if the Subcommittee believes that consultation with the full Committee is not feasible in the time available, or with the Chairman, if the Chairman believes that consultation with the Subcommittee is not feasible in the time available): A. Any operation that would result in a change in the System's overall open position in foreign currencies exceeding $1.5 billion since the most recent regular meeting of the Committee. B. Any swap drawing proposed by a foreign bank exceeding the larger of (i) $200 million or (ii) 15 percent of the size of the swap arrangement. 3. The Manager shall also consult with the Subcommittee or the Chairman about proposed swap drawings by the System and about any operations that are not of a routine character. Developments in Financial Markets and the Federal Reserve's Balance Sheet The Manager of the System Open Market Account reported on developments in domestic and foreign financial markets during the period since the Committee met on December 15-16, 2009. Financial market conditions remained supportive of economic growth, though volatility in securities markets increased notably toward the end of the intermeeting period. Year-end funding pressures were minimal. No market strains had appeared as a result of the imminent closing, on February 1, of most of the Federal Reserve's special liquidity facilities. The Manager also reported on System open market operations in agency debt and agency MBS during the intermeeting period. The Desk continued to gradually slow the pace of its purchases of these securities as it moved toward completing the Committee's program of asset purchases by March 31. The Desk also continued to engage in dollar roll transactions in agency MBS securities to facilitate settlement of its outright purchases. The Federal Reserve's total assets remained a bit above $2.2 trillion, as the increase in the System's holdings of securities was almost entirely offset by a further decline in usage of the System's credit and liquidity facilities. By unanimous vote, the Committee ratified the Desk's transactions. Participants agreed that the Desk should continue the interim approach of not reinvesting the proceeds of maturing or prepaid agency securities and MBS held by the Federal Reserve. The Desk had continued to reinvest the proceeds of maturing Treasury securities by acquiring newly auctioned Treasury securities issued on the same day its existing holdings matured; participants agreed that the Desk should continue this practice for now, but the Committee would consider further its policy for redeeming or reinvesting maturing Treasury securities. There were no open market operations in foreign currencies for the System's account during the intermeeting period. Staff briefed the Committee on current usage of the discount window and other liquidity facilities and suggested additional steps policymakers could take to normalize the Federal Reserve's liquidity provision. These steps included continuing to scale back amounts offered through the Term Auction Facility (TAF); returning to the pre-crisis standard of one-day maturity for primary credit loans to all but the smallest depository institutions; and increasing, initially to 50 basis points from 25 basis points, the spread between the primary credit rate and the upper end of the Committee's target range for the federal funds rate. Setting the spread reflects a balance between two objectives: encouraging depository institutions to use the discount window as a backup source of liquidity when they are faced with temporary liquidity shortfalls or when funding markets are disrupted, and discouraging depository institutions from relying on the discount window as a routine source of funds when other funding is generally available. The spread was 100 basis points before the financial crisis emerged; the Federal Reserve narrowed the spread to 50 basis points and then to 25 basis points as part of its response to the financial crisis. Participants judged that improvements in bank funding markets warranted reducing amounts offered at TAF auctions toward zero in three steps over the next few months, while noting that they would be prepared to modify that plan if necessary to support financial stability and economic growth. They agreed that it would soon be appropriate to return the maturity of primary credit loans to overnight and to widen the spread between the primary credit rate and the top of the Committee's target range for the federal funds rate. Several participants noted that the optimal spread could depend, in part, on the Committee's eventual decisions about the most suitable approach to implementing U.S. monetary policy over the longer term. Participants generally agreed that such steps to return the Federal Reserve's liquidity provision to a normal footing would be technical adjustments to reflect the notable diminution of the market strains that had made the creation of new liquidity facilities and expansion of existing facilities necessary and emphasized that such steps would not indicate a change in the Committee's assessment of the appropriate stance of monetary policy or the proper time to begin moving to a less accommodative policy stance. Secretary's note: After the FOMC meeting, the Chairman, acting under authority delegated by the Board of Governors, directed that TAF auction amounts be reduced to $50 billion for the February 8 auction and to $25 billion for the final TAF auction, to be held on March 8. Staff also briefed policymakers about tools and strategies for an eventual withdrawal of policy accommodation and summarized linkages between these tools and strategies and alternative frameworks for implementing monetary policy in the longer run. The tools for moving to a less accommodative policy stance encompassed (1) raising the interest rate paid on excess reserve balances (the IOER rate); (2) executing term reverse repurchase agreements with the primary dealers; (3) executing term RRPs with a broader range of counterparties; (4) using a term deposit facility (TDF) to absorb excess reserves; (5) redeeming maturing and prepaid securities held by the Federal Reserve without reinvesting the proceeds; and (6) selling securities held by the Federal Reserve before they mature. All but the first of these tools would shrink the supply of reserve balances; the last two would also shrink the Federal Reserve's balance sheet. The Desk already had successfully tested its ability to conduct term RRPs with primary dealers by arranging several small-scale transactions using Treasury securities and agency debt as collateral; staff anticipated that the Federal Reserve would be able to execute term RRPs against MBS early this spring and would have the capability to conduct RRPs with an expanded set of counterparties soon after. In coming weeks, staff would analyze comments received in response to a Federal Register notice, published in late December, requesting the public's input on the TDF proposal. Staff would then prepare a final proposal for the Board's consideration. A TDF could be operational as soon as May. Staff described several feasible strategies for using these six tools to support a gradual return toward a more normal stance of monetary policy: (1) using one or more of the tools to progressively reduce the supply of reserve balances--which rose to an exceptionally high level as a consequence of the expansion of the Federal Reserve's liquidity and lending facilities and subsequent large-scale asset purchases during the financial crisis--before raising the IOER rate and the target for the federal funds rate; (2) increasing the IOER rate in line with an increase in the federal funds rate target and concurrently using one or more tools to reduce the supply of reserve balances; and (3) raising the IOER rate and the target for the federal funds rate and using reserve draining tools only if the federal funds rate did not increase in line with the Committee's target. Participants expressed a range of views about the tools and strategies for removing policy accommodation when that step becomes appropriate. All agreed that raising the IOER rate and the target for the federal funds rate would be a key element of a move to less accommodative monetary policy. Most thought that it likely would be appropriate to reduce the supply of reserve balances, to some extent, before the eventual increase in the IOER rate and in the target for the federal funds rate, in part because doing so would tighten the link between short-term market rates and the IOER rate; however, several noted that draining operations might be seen as a precursor to tightening and should only be undertaken when the Committee judged that an increase in its target for the federal funds rate would soon be appropriate. For the same reason, a few judged that it would be better to drain reserves concurrently with the eventual increase in the IOER and target rates. With respect to longer-run approaches to implementing monetary policy, most policymakers saw benefits in continuing to use the federal funds rate as the operating target for implementing monetary policy, so long as other money market rates remained closely linked to the federal funds rate. Many thought that an approach in which the primary credit rate was set above the Committee's target for the federal funds rate and the IOER rate was set below that target--a corridor system--would be beneficial. Participants recognized, however, that the supply of reserve balances would need to be reduced considerably to lift the funds rate above the IOER rate. Several saw advantages to using the IOER rate, rather than a target for a market rate, to indicate the stance of policy. Participants noted that their judgments were tentative, that they would continue to discuss the ultimate operating regime, and that they might well gain useful information about longer-run approaches during the eventual withdrawal of policy accommodation. Finally, staff noted that the Committee might want to address both the eventual size of the Federal Reserve's balance sheet and its composition. Policymakers were unanimous in the view that it will be appropriate to shrink the supply of reserve balances and the size of the Federal Reserve's balance sheet substantially over time. Moreover, they agreed that it will eventually be appropriate for the System Open Market Account to return to holding only securities issued by the U.S. Treasury, as it did before the financial crisis. Several thought the Federal Reserve should hold, eventually, a portfolio composed largely of shorter-term Treasury securities. Participants agreed that a policy of redeeming and not replacing agency debt and MBS as those securities mature or are prepaid would contribute to achieving both goals and thus would be appropriate. Many thought it would also be desirable to redeem some or all of the Treasury securities owned by the Federal Reserve as they mature, recognizing that at some point in the future the Federal Reserve would need to resume purchases of Treasury securities to offset reductions in other assets and to accommodate growth in the public's demand for U.S. currency. Participants expressed a range of views about asset sales. Most judged that a future program of gradual asset sales could be helpful in shrinking the size of the Federal Reserve's balance sheet, reducing reserve balances, and shifting the composition of securities holdings back toward Treasury securities; however, many were concerned that such transactions could cause market disruptions and have adverse implications for the economic recovery, particularly if they were to begin before the recovery had become self-sustaining and before the Committee had determined that a tightening of financial conditions was appropriate and had begun to raise short-term interest rates. Several thought it important to begin a program of asset sales in the near future to ensure that the Federal Reserve's balance sheet shrinks more quickly and in a more predictable manner than could be achieved solely by redeeming maturing securities and not reinvesting prepayments; they judged that a program of asset sales spread over a number of years would underscore the Committee's determination to exit from the period of exceptionally accommodative monetary policy in a manner and at a pace that would keep inflation contained without having large effects on asset prices or market interest rates. A few suggested that the pace of asset sales, and potentially of purchases, could be adjusted over time in response to developments in the economy and the evolution of the economic outlook. The Committee made no decisions about asset sales at this meeting. Staff Review of the Economic Situation The information reviewed at the January 26-27 meeting suggested that economic activity continued to strengthen in recent months. Consumer spending was well maintained in the fourth quarter, and business expenditures on equipment and software appeared to expand substantially. However, the improvement in the housing market slowed, and spending on nonresidential structures continued to fall. Recent data suggested that the pace of inventory liquidation diminished considerably last quarter, providing a sizable boost to economic activity. Indeed, industrial production advanced at a solid pace in the fourth quarter. In the labor market, layoffs subsided noticeably in the final months of last year, but the unemployment rate remained elevated and hiring stayed weak. Meanwhile, increases in energy prices pushed up headline consumer price inflation even as core consumer price inflation remained subdued. Some indicators suggested that the deterioration in the labor market was abating. The pace of job losses continued to moderate: The three-month change in private nonfarm payrolls had become progressively less negative since early 2009; that pattern was widespread across industries. The unemployment rate was essentially unchanged from October through December. The labor force participation rate, however, had declined steeply since the spring, likely reflecting, at least in part, adverse labor market conditions. Moreover, hiring remained weak, the total number of individuals receiving unemployment insurance--including extended and emergency benefits--continued to climb, the average length of ongoing unemployment spells rose steeply, and joblessness became increasingly concentrated among the long-term unemployed. Total industrial production (IP) rose in December, the sixth consecutive increase since its trough. The gain in December primarily resulted from a jump in output at electric and natural gas utilities caused by unseasonably cold weather. Manufacturing IP edged down after large and widespread gains in November. For the fourth quarter as a whole, the solid increase in manufacturing IP reflected a recovery in motor vehicle output, rising export demand, and a slower pace of business inventory liquidation. Output of consumer goods, business equipment, and materials all rose in the fourth quarter, though the average monthly gains in these categories were a little smaller than in the third quarter. The available near-term indicators of production suggested that IP would increase further in coming months. Consumer spending continued to trend up late last year but remained well below its pre-recession level. After a strong increase in November, real personal consumption expenditures appeared to drop back some in December. Retail sales may have been held down by unusually bad weather, but purchases of new light motor vehicles continued to increase. The fundamental determinants of household spending--including real disposable income and wealth--strengthened modestly, on balance, near the end of the year but were still relatively weak. Despite the improvement from early last year, measures of consumer sentiment remained low relative to historical norms, and terms and standards on consumer loans, particularly credit card loans, stayed very tight. The recovery in the housing market slowed in the second half of 2009, even though a number of factors supported housing demand. Interest rates for conforming 30-year fixed-rate mortgages remained historically low. In addition, the Reuters/University of Michigan Surveys of Consumers reported that the number of respondents who expected house prices to increase continued to exceed the number who expected prices to decrease. Sales of existing single-family homes rose strongly from July to November but fell in December, a pattern that suggested sales were pulled ahead in anticipation of the originally scheduled expiration of the first-time homebuyer credit on November 30. Still, existing home sales remained above their level in earlier quarters. Sales of new homes also turned down in November and December, retracing part of their recovery earlier in the year. Similarly, starts of single-family homes retreated a little from June to December after advancing briskly last spring. The pace of construction was slow enough that even the modest pace of new home sales was sufficient to further reduce the overhang of unsold new single-family houses. Real spending on equipment and software apparently rose robustly in the fourth quarter following a slight increase in the previous quarter. Spending on high-tech equipment, in particular, appeared to increase at a considerably more rapid clip in the fourth quarter than in the third; both orders and shipments of high-tech equipment rose markedly, on net, in October and November. Business purchases of motor vehicles likely also climbed in the fourth quarter. Outside of the transportation and high-tech sectors, business outlays on equipment and software appeared to change little in the fourth quarter. Conditions in the nonresidential construction sector generally remained poor. Real spending on structures outside of the drilling and mining sector dropped in the third quarter; data on nominal expenditures through November pointed to an even faster rate of decline in the fourth quarter. The pace of real business inventory liquidation appeared to decrease considerably in the fourth quarter. After three quarters of sizable declines, real nonfarm inventories shrank at a more modest pace in October, and book-value data for this category suggested that inventories may have increased in real terms in November. Available data suggested that the change in inventory investment—including a sizable accumulation in wholesale stocks of farm products—made an appreciable contribution to the increase in real gross domestic product (GDP) in the fourth quarter. Consumer price inflation was modest in December after being boosted in the preceding two months by increases in energy prices. Core consumer price inflation remained subdued. Price increases for non-energy services slowed early last year and remained modest throughout 2009, reflecting declining prices for housing services and perhaps the deceleration in labor costs. Price increases for core goods were quite modest during the second half of 2009. According to survey results, households' expectations of near-term inflation increased in January; in addition, median longer-term inflation expectations edged up, though they remained near the lower end of the narrow range that has prevailed over the past few years. The U.S. international trade deficit widened in November, as a sharp rise in nominal imports outpaced an increase in exports. The rise in exports was driven primarily by a large gain in agricultural exports, which was partially offset by a decline in exports of consumer goods that followed robust growth in October. Imports of oil accounted for roughly one-third of the increase in total imports, though most other categories of imports also recorded gains. Incoming data suggested that activity in advanced foreign economies continued to expand in the fourth quarter, though at a moderate pace. However, unemployment rates remained elevated and consumption indicators were mixed. Credit conditions improved further, as lending to the private sector expanded in some economies. Increases in export and import volumes pointed to a gradual recovery in international trade. Economic activity in emerging market economies continued to expand in the fourth quarter, although at a pace slower than that of the third quarter. Within emerging Asia, growth appeared to have remained robust in China and to have slowed elsewhere. In Latin America, indicators pointed to a continuation of growth in much of the region, although growth in Mexico appeared to slow significantly following the third quarter's outsized gain. Amid rising energy prices, 12-month headline inflation for December picked up in all advanced foreign economies except Japan, where deflation moderated only mildly. Headline inflation continued to rise in emerging Asia, driven by energy and food prices. In Latin America, headline inflation remained below its earlier elevated pace. Staff Review of the Financial Situation The decision by the FOMC to keep the target range for the federal funds rate unchanged at the December meeting and its retention of the "extended period" language in the statement were widely anticipated by market participants and elicited little price response. Later in the intermeeting period, the expected path of the federal funds rate implied by federal funds and Eurodollar futures quotes shifted down slightly as investors apparently interpreted Federal Reserve communications, including the discussion of large-scale asset purchases in the FOMC minutes, as pointing to a more protracted period of accommodative monetary policy than had been anticipated. By contrast, yields on 2- and 10-year nominal Treasury securities were about unchanged on net. Inflation compensation based on 5-year Treasury inflation-protected securities (TIPS) increased; the increase likely reflected higher inflation risk premiums and a further improvement in TIPS market liquidity, along with some rise in inflation expectations owing, in part, to increases in oil prices. Inflation compensation 5 to 10 years ahead declined slightly. Financial market conditions remained supportive of economic growth over the intermeeting period, and short-term funding markets were generally stable. Spreads between London interbank offered rates (Libor) and overnight index swap (OIS) rates at one- and three-month maturities remained low, while spreads at the six-month maturity continued to edge down. Spreads on A2/P2-rated commercial paper (CP) and AA-rated asset-backed CP held steady at the low end of the range that has prevailed since mid-2007. Strong demand for Treasury bills in the cash and repurchase agreement (repo) market, together with a seasonal decline in bills outstanding, put downward pressure on both bill yields and short-term repo rates. Although year-end pressures in short-term funding markets were generally modest amid ample liquidity, the repo market experienced some year-end dislocations, with a few transactions reportedly occurring at negative interest rates. Use of Federal Reserve credit facilities edged lower over the intermeeting period, and market commentary suggested little concern about the impending expiration of a number of the facilities. After trending higher for most of the intermeeting period, broad stock price indexes subsequently reversed course amid elevated volatility, ending the period little changed on balance. The gap between the staff's estimate of the expected real equity return over the next 10 years for S&P 500 firms and the real 10-year Treasury yield--a rough gauge of the equity risk premium--stayed about the same and remained well above its average level during the past decade. Over the intermeeting period, yields on both investment-grade and speculative-grade corporate bonds edged down, while those on comparable-maturity Treasury securities held steady. Estimates of bid-asked spreads for corporate bonds--a measure of liquidity in the corporate bond market--remained steady. In the leveraged loan market, average bid prices rose further and bid-asked spreads were little changed. Overall, net debt financing by nonfinancial businesses was near zero in the fourth quarter after declining in the third, consistent with weak demand for credit and still tight credit standards and terms at banks. In December, gross public equity issuance by nonfinancial firms maintained its solid pace and issuance by financial firms increased noticeably, as several large banks issued shares and used the proceeds to repay capital injections they had received from the Troubled Asset Relief Program. Financing conditions for commercial real estate, however, remained strained. Moody's index of commercial property prices showed another drop in October, bringing the index back to its 2002 level. Delinquency rates on loans in commercial mortgage-backed securities pools increased further in December. The average interest rate on 30-year conforming fixed-rate residential mortgages increased slightly over the intermeeting period but remained within the narrow range of values over recent months. Consumer credit contracted for the 10th consecutive month in November, owing to a further steep decline in revolving credit. Credit card interest rate spreads continued to increase in November. In contrast, spreads on new auto loans extended their downtrend through early January. Delinquency rates on consumer loans remained high in recent months. Issuance of credit card asset-backed securities was minimal in October and November but picked up in December after the Federal Deposit Insurance Corporation announced a temporary extension of safe-harbor rules for its handling of securitized assets should a sponsoring bank be taken into receivership. Commercial bank credit continued to contract in December, as an increase in banks' securities holdings was more than offset by a large drop in total loans. Commercial and industrial loans and commercial real estate loans again fell markedly. Although a substantial fraction of banks continued to tighten their credit policies on commercial real estate loans in the fourth quarter, lending standards for most other types of loans were little changed, according to the January Senior Loan Officer Opinion Survey on Bank Lending Practices. Nonetheless, standards and terms on all major loan types remained tight, and the demand for loans reportedly weakened further. M2 continued to expand sluggishly in December. Growth of liquid deposits remained robust, but small time deposits and retail money market mutual funds again contracted at a rapid pace in response to the low yields on those assets. The monetary base and total bank reserves were roughly flat, as the contraction in credit outstanding from the Federal Reserve's liquidity and credit facilities was about offset by the Desk's purchases of agency debt and MBS. Over the intermeeting period, benchmark sovereign yields in most advanced foreign economies displayed some volatility but ended little changed on net. Global sovereign bond offerings since the start of the year had been reasonably well received, although mounting fiscal concerns made investors more reluctant to hold debt issued by the Greek government; sovereign yields rose in Greece and, to a lesser extent, in several other countries where fiscal issues have raised concerns among investors. All major foreign central banks kept their policy rates unchanged. Foreign equity prices generally ended the intermeeting period down. European financial stocks declined substantially, as early profit reports for the fourth quarter from a few banks rekindled some concerns about the health of the banking system. The broad nominal index of the foreign exchange value of the dollar rose, reportedly reflecting a growing perception that U.S. growth prospects were better than those in Europe and Japan. Concerns that policy tightening by China might restrain the global recovery also may have contributed to the dollar's appreciation against many currencies late in the period. Staff Economic Outlook In the forecast prepared for the January FOMC meeting, the staff revised up its estimate of the increase in real GDP in the fourth quarter of 2009. The upward revision was in inventory investment; the staff's projection of the increase in final demand was unchanged. Nonfarm businesses apparently moved earlier to stem the pace of inventory liquidation than the staff had anticipated. As a result, the economy likely entered 2010 with production in closer alignment with sales than the staff had expected in mid-December. Apart from the fluctuations in inventories, economic developments largely were as the staff had anticipated. The incoming information on the labor market and industrial production was broadly consistent with staff expectations, and, though housing activity seemed to be on a lower-than-anticipated trajectory, recent data on business capital spending were slightly above expectations. The staff continued to project a moderate recovery in economic activity over the next two years, with economic growth supported by the accommodative stance of monetary policy and by a further waning of the factors that weighed on spending and production over the past two years. The staff also continued to expect that resource slack would be taken up only gradually over the forecast period. The staff's forecasts for some slowing of core and headline inflation over the next two years were little changed. There were no significant surprises in the incoming price data, substantial slack in resource utilization was still expected to put downward pressure on costs, and longer-term inflation expectations remained relatively stable. Given staff projections for consumer energy prices, headline inflation was projected to run somewhat above core inflation in 2010 but to slow to the same subdued rate as core inflation in 2011. Participants' Views on Current Conditions and the Economic Outlook In conjunction with this FOMC meeting, all meeting participants--the five members of the Board of Governors and the presidents of the 12 Federal Reserve Banks--provided projections for economic growth, the unemployment rate, and consumer price inflation for each year from 2010 through 2012 and over a longer horizon. Longer-run projections represent each participant's assessment of the rate to which each variable would be expected to converge over time under appropriate monetary policy and in the absence of further shocks. Participants' forecasts through 2012 and over the longer run are described in the Summary of Economic Projections, which is attached as an addendum to these minutes. In their discussion of the economic situation and outlook, participants agreed that the incoming data and information received from business contacts, though mixed, indicated that economic growth had strengthened in the fourth quarter, that firms were reducing payrolls at a less rapid pace, and that downside risks to the outlook for economic growth had diminished a bit further. Participants saw the economic news as broadly in line with the expectations for moderate growth and subdued inflation in 2010 that they held when the Committee met in mid-December; moreover, financial conditions were much the same, on balance, as when the FOMC last met. Accordingly, participants' views about the economic outlook had not changed appreciably. Many noted the evidence that the pace of inventory decumulation slowed quite substantially in the fourth quarter of 2009 as firms increased output to bring production into closer alignment with sales. Participants saw the slower pace of inventory reductions as a welcome indication that, in general, firms no longer had large inventory overhangs. But they observed that business contacts continued to report great reluctance to build inventories, increase payrolls, and expand capacity. Participants expected the economic recovery to continue, but most anticipated that the pickup in output and employment growth would be rather slow relative to past recoveries from deep recessions. A moderate pace of expansion would imply slow improvement in the labor market this year, with unemployment declining only gradually. Most participants again projected that the economy would grow somewhat more rapidly in 2011 and 2012, generating a more pronounced decline in the unemployment rate, as financial conditions and the availability of credit continue to improve. In general, participants saw the upside and downside risks to the outlook for economic growth as roughly balanced. Participants agreed that underlying inflation currently was subdued and was likely to remain so for some time. Some noted the risk that, with output well below potential over the next couple of years, inflation could edge further below the rates they judged most consistent with the Federal Reserve's dual mandate for maximum employment and price stability; others, focusing on risks to inflation expectations and the challenge of removing monetary accommodation in a timely manner, saw inflation risks as tilted toward the upside, especially in the medium term. The weakness in labor markets continued to be an important concern for the FOMC; moreover, the prospects for job growth remained an important source of uncertainty in the economic outlook, particularly in the outlook for consumer spending. While the average pace of layoffs diminished substantially in recent months, few firms were hiring. The unusually large fraction of individuals who were working part time for economic reasons, as well as the uncommonly low level of the average workweek, pointed to a gradual increase in payrolls for some time even if hours worked were to increase substantially as the economic recovery proceeded. Indeed, many business contacts again reported that they would be cautious in hiring, saying they expected to meet any near-term increase in demand by raising existing employees' hours and boosting productivity, thus delaying the need to add employees. If businesses were able to continue generating large productivity gains, as in recent quarters, then firms would need to hire fewer workers in the near term to meet rising demands for their products. But if the unusually rapid productivity growth seen in recent quarters was not sustained, then job growth could pick up significantly as productivity returned to sustainable levels. The rise in employment of temporary workers in recent months appeared to be continuing; historical experience suggested that increased use of temporary help could presage a broader increase in job growth. Participants generally saw the data and anecdotal evidence as indicating moderate growth in demands for goods and services, although with substantial variation across sectors. Consumer spending appeared to be increasing modestly. Reports on holiday sales were mixed. Retailers indicated that consumers appeared more willing to buy but that they remained unusually sensitive to pricing. Business contacts continued to report that they were limiting investment outlays pending resolution of uncertainty about sales prospects and future tax and regulatory policies; moreover, they had substantial excess capacity and thus little need to expand production facilities. Even so, the data indicated solid growth in business spending on high-tech equipment in recent months. Anecdotal evidence suggested that such spending was being driven by opportunities to reduce costs and by replacement investment that firms had deferred during the downturn. By and large, participants judged that residential investment had stabilized but did not expect housing construction to make a sizable contribution to economic growth during the next year or two. Commercial construction continued to trend down, primarily reflecting weak fundamentals, though financing constraints probably were also playing a role. Stronger economic growth abroad was contributing to growth in U.S. exports, thus helping support the recovery in industrial production in the United States. Policymakers judged that financial conditions were, on balance, about as supportive of growth as when the Committee met in December. Though volatility in equity prices increased late in the intermeeting period, broad equity price indexes were about unchanged overall, private credit spreads narrowed somewhat, and financial markets generally continued to function significantly better than early last year. All categories of bank loans, however, continued to contract sharply. Survey evidence suggested that banks had ceased tightening standards on most types of business and consumer loans, though commercial real estate loans were a notable exception. Anecdotal evidence suggested that some banks were starting to look for opportunities to expand lending. Though headline inflation had been variable, largely reflecting swings in energy prices, core measures of inflation were subdued and were expected to remain so. One participant noted that core inflation had been held down in recent quarters by unusually slow increases in the price index for shelter, and that the recent behavior of core inflation might be a misleading signal of the underlying inflation trend. Reports from business contacts suggested less price discounting, but pricing power remained limited. Wage growth continued to be restrained, and unit labor costs were still falling. Energy prices had dropped back in recent weeks, but many participants saw upward pressures on commodity prices associated with expanding global economic activity as an inflation risk. However, some noted that the high degree of slack in resource utilization posed a downside risk to inflation. Survey measures of expected future inflation were fairly stable, but some market-based measures of inflation expectations and inflation risk suggested continuing concern among market participants about the risk of higher medium-term inflation, perhaps reflecting large fiscal deficits and the size of the Federal Reserve's balance sheet. Though participants agreed there was considerable slack in resource utilization, their judgments about the degree of slack varied. The several extensions of emergency unemployment insurance benefits appeared to have raised the measured unemployment rate, relative to levels recorded in past downturns, by encouraging some who have lost their jobs to remain in the labor force. If that effect were large--some estimates suggested it could account for 1 percentage point or more of the increase in the unemployment rate during this recession--then the reported unemployment rate might be overstating the amount of slack in resource utilization relative to past periods of high unemployment. Several participants observed that the necessity of reallocating labor across sectors as the recovery proceeds, as well as the loss of skills caused by high levels of long-term unemployment and permanent separations, could reduce the economy's potential output, at least temporarily; historical experience following large adverse financial shocks suggests such an effect. On the other hand, if recent productivity gains were to be sustained, as some business contacts indicated they would be, potential output currently could be higher than standard measures suggested, and the high level of the unemployment rate could be a more accurate indication of slack in resource utilization than usual measures of the output gap. Committee Policy Action In their discussion of monetary policy for the period ahead, members agreed that no changes to the Committee's large-scale asset purchase programs or to its target range for the federal funds rate were warranted at this meeting, inasmuch as the asset purchase programs were nearing completion and neither the economic outlook nor financial conditions had changed appreciably since the December meeting. Accordingly, the Committee affirmed its intention to purchase a total of $1.25 trillion of agency MBS and about $175 billion of agency debt by the end of the current quarter and to gradually slow the pace of these purchases to promote a smooth transition in markets. The Committee emphasized that it would continue to evaluate its purchases of securities in light of the evolving economic outlook and conditions in financial markets. Members recognized that references to "purchases" of securities would need to be modified as the completion of the asset purchase programs draws near. One member recommended that the FOMC replace the portion of the statement that indicates the Committee will evaluate its "purchases" of securities with an indication that the Committee will evaluate its "holdings" of securities. The change in wording would encompass the possibility that the Committee might decide, at some point, either to sell securities or to purchase additional securities. Other members judged that it would be premature to make such a change in the statement before observing economic and financial conditions as the Committee's current asset purchase program comes to a close. Accordingly, the Committee decided to retain the reference to securities "purchases" for the time being. The Committee also affirmed its 0 to 1/4 percent target range for the federal funds rate and, based on the outlook for a gradual economic recovery, decided to reiterate its anticipation that economic conditions, including low levels of resource utilization, subdued inflation trends, and stable inflation expectations, were likely to warrant exceptionally low rates for an extended period. Members agreed that the path of short-term rates going forward would depend on the evolution of the economic outlook. Committee members and Board members agreed that, with few exceptions, the functioning of most financial markets, including interbank markets, no longer showed significant impairment. Accordingly they agreed that the statement to be released following the meeting would indicate that the Federal Reserve would be closing the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility on February 1, 2010. Committee members also agreed to announce that temporary liquidity swap arrangements between the Federal Reserve and other central banks would expire on February 1. In addition, the statement would say that amounts available through the Term Auction Facility would be scaled back further, with $50 billion of 28-day credit to be offered on February 8 and $25 billion of 28-day credit to be offered at the final auction of March 8. The statement also would note that the anticipated expiration dates for the Term Asset-Backed Securities Loan Facility remained June 30, 2010, for loans backed by new-issue commercial mortgage-backed securities, and March 31, 2010, for loans backed by all other types of collateral. Members emphasized that they were prepared to modify these plans if necessary to support financial stability and economic growth. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to purchase agency debt and agency MBS during the intermeeting period with the aim of providing support to private credit markets and economic activity. The timing and pace of these purchases should depend on conditions in the markets for such securities and on a broader assessment of private credit market conditions. The Desk is expected to execute purchases of about $175 billion in housing-related agency debt and about $1.25 trillion of agency MBS by the end of the first quarter. The Desk is expected to gradually slow the pace of these purchases as they near completion. The Committee anticipates that outright purchases of securities will cause the size of the Federal Reserve's balance sheet to expand significantly in coming months. The Committee directs the Desk to engage in dollar roll transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions to be conducted through the end of the first quarter, as directed above. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability." The vote encompassed approval of the statement below to be released at 2:15 p.m.: "Information received since the Federal Open Market Committee met in December suggests that economic activity has continued to strengthen and that the deterioration in the labor market is abating. Household spending is expanding at a moderate rate but remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software appears to be picking up, but investment in structures is still contracting and employers remain reluctant to add to payrolls. Firms have brought inventory stocks into better alignment with sales. While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability. With substantial resource slack continuing to restrain cost pressures and with longer-term inflation expectations stable, inflation is likely to be subdued for some time. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve is in the process of purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. In order to promote a smooth transition in markets, the Committee is gradually slowing the pace of these purchases, and it anticipates that these transactions will be executed by the end of the first quarter. The Committee will continue to evaluate its purchases of securities in light of the evolving economic outlook and conditions in financial markets. In light of improved functioning of financial markets, the Federal Reserve will be closing the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility on February 1, as previously announced. In addition, the temporary liquidity swap arrangements between the Federal Reserve and other central banks will expire on February 1. The Federal Reserve is in the process of winding down its Term Auction Facility: $50 billion in 28-day credit will be offered on February 8 and $25 billion in 28-day credit will be offered at the final auction on March 8. The anticipated expiration dates for the Term Asset-Backed Securities Loan Facility remain set at June 30 for loans backed by new-issue commercial mortgage-backed securities and March 31 for loans backed by all other types of collateral. The Federal Reserve is prepared to modify these plans if necessary to support financial stability and economic growth." Voting for this action: Ben Bernanke, William C. Dudley, James Bullard, Elizabeth Duke, Donald L. Kohn, Sandra Pianalto, Eric Rosengren, Daniel K. Tarullo, and Kevin Warsh. Voting against this action: Thomas M. Hoenig. Mr. Hoenig dissented because he believed it was no longer advisable to indicate that economic and financial conditions were likely to "warrant exceptionally low levels of the federal funds rate for an extended period." In recent months, economic and financial conditions improved steadily, and Mr. Hoenig was concerned that, under these improving conditions, maintaining short-term interest rates near zero for an extended period of time would lay the groundwork for future financial imbalances and risk an increase in inflation expectations. Accordingly, Mr. Hoenig believed that it would be more appropriate for the Committee to express an expectation that the federal funds rate would be low for some time--rather than exceptionally low for an extended period. Such a change in communication would provide the Committee flexibility to begin raising rates modestly. He further believed that moving to a modestly higher federal funds rate soon would lower the risks of longer-run imbalances and an increase in long-run inflation expectations, while continuing to provide needed support to the economic recovery. It was agreed that the next meeting of the Committee would be held on Tuesday, March 16, 2010. The meeting adjourned at 1:20 p.m. on January 27, 2010. Notation Vote By notation vote completed on January 5, 2010, the Committee unanimously approved the minutes of the FOMC meeting held on December 15-16, 2009. _____________________________ Brian F. Madigan Secretary 1. Attended Tuesday's session only. Return to text 2. Attended Wednesday's session only. Return to text Return to top

2010-01-27

Statement

Information received since the Federal Open Market Committee met in December suggests that economic activity has continued to strengthen and that the deterioration in the labor market is abating. Household spending is expanding at a moderate rate but remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software appears to be picking up, but investment in structures is still contracting and employers remain reluctant to add to payrolls. Firms have brought inventory stocks into better alignment with sales. While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability. With substantial resource slack continuing to restrain cost pressures and with longer-term inflation expectations stable, inflation is likely to be subdued for some time. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve is in the process of purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. In order to promote a smooth transition in markets, the Committee is gradually slowing the pace of these purchases, and it anticipates that these transactions will be executed by the end of the first quarter. The Committee will continue to evaluate its purchases of securities in light of the evolving economic outlook and conditions in financial markets. In light of improved functioning of financial markets, the Federal Reserve will be closing the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility on February 1, as previously announced. In addition, the temporary liquidity swap arrangements between the Federal Reserve and other central banks will expire on February 1. The Federal Reserve is in the process of winding down its Term Auction Facility: $50 billion in 28-day credit will be offered on February 8 and $25 billion in 28-day credit will be offered at the final auction on March 8. The anticipated expiration dates for the Term Asset-Backed Securities Loan Facility remain set at June 30 for loans backed by new-issue commercial mortgage-backed securities and March 31 for loans backed by all other types of collateral. The Federal Reserve is prepared to modify these plans if necessary to support financial stability and economic growth. Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh. Voting against the policy action was Thomas M. Hoenig, who believed that economic and financial conditions had changed sufficiently that the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted.

2010-01-06

Minute

A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held in the offices of the Board of Governors in Washington, D.C., on Tuesday, December 15, 2009, at 2:00 p.m. and continued on Wednesday, December 16, 2009, at 9:00 a.m. PRESENT: Mr. Bernanke, Chairman Mr. Dudley, Vice Chairman Ms. Duke Mr. Evans Mr. Kohn Mr. Lacker Mr. Lockhart Mr. Tarullo Mr. Warsh Ms. Yellen Mr. Bullard, Ms. Cumming, Mr. Hoenig, Ms. Pianalto, and Mr. Rosengren, Alternate Members of the Federal Open Market Committee Messrs. Fisher, Kocherlakota, and Plosser, Presidents of the Federal Reserve Banks of Dallas, Minneapolis, and Philadelphia, respectively Mr. Madigan, Secretary and Economist Mr. Luecke, Assistant Secretary Mr. Skidmore, Assistant Secretary Ms. Smith, Assistant Secretary Mr. Alvarez, General Counsel Mr. Baxter, Deputy General Counsel Mr. Sheets, Economist Messrs. Altig, Clouse, Connors, Kamin, Slifman, Tracy, and Wilcox, Associate Economists Mr. Sack, Manager, System Open Market Account Ms. Johnson, Secretary of the Board, Office of the Secretary, Board of Governors Mr. Parkinson, Director, Division of Bank Supervision and Regulation, Board of Governors Mr. Frierson,1 Deputy Secretary, Office of the Secretary, Board of Governors Mr. Struckmeyer, Deputy Staff Director, Office of the Staff Director for Management, Board of Governors Mr. English, Deputy Director, Division of Monetary Affairs, Board of Governors Ms. Robertson, Assistant to the Board, Office of Board Members, Board of Governors Ms. Edwards, Messrs. Levin2 and Nelson,1 Senior Associate Directors, Division of Monetary Affairs, Board of Governors; Messrs. Reifschneider and Wascher, Senior Associate Directors, Division of Research and Statistics, Board of Governors Mr. Meyer, Senior Adviser, Division of Monetary Affairs, Board of Governors; Mr. Oliner, Sen-ior Adviser, Division of Research and Statistics, Board of Governors Ms. Zickler, Deputy Associate Director, Division of Research and Statistics, Board of Governors Mr. Small, Project Manager, Division of Monetary Affairs, Board of Governors Mr. Bassett, Section Chief, Division of Monetary Affairs, Board of Governors; Mr. Roberts,2 Section Chief, Division of Research and Statistics, Board of Governors Ms. Beattie,3 Assistant to the Secretary, Office of the Secretary, Board of Governors Ms. Low, Open Market Secretariat Specialist, Division of Monetary Affairs, Board of Governors Mr. Williams, Records Management Analyst, Division of Monetary Affairs, Board of Governors Messrs. Fuhrer and Rosenblum, Executive Vice Presidents, Federal Reserve Banks of Boston and Dallas, respectively Mr. Krane, Ms. Mester, Messrs. Schweitzer and Waller, Senior Vice Presidents, Federal Reserve Banks of Chicago, Philadelphia, Cleveland, and St. Louis, respectively Mr. Weber, Senior Research Officer, Federal Reserve Bank of Minneapolis Messrs. Clark, Dotsey,2 Fernald, Hornstein, Olivei,2 and Wynne,2 Vice Presidents, Federal Reserve Banks of Kansas City, Philadelphia, San Francisco, Richmond, Boston, Dallas, respectively Messrs. Friedman and van der Klaauw,2 Assistant Vice Presidents, Federal Reserve Bank of New York Mr. Martinez-Garcia,2 Research Economist, Federal Reserve Bank of Dallas Developments in Financial Markets and the Federal Reserve's Balance Sheet The Manager of the System Open Market Account reported on developments in domestic and foreign financial markets since the Committee's November 3-4 meeting. Financial conditions generally had become somewhat more supportive of economic growth. There was little evidence of year-end funding pressures, although demand for Treasury bills with maturities extending just beyond year-end remained elevated. The Manager also reported on System open market operations in agency debt and agency mortgage-backed securities (MBS) during the intermeeting period. The Desk continued to gradually slow the pace of purchases of these securities in accordance with the program for asset purchases that the Committee announced at the end of its November meeting. By unanimous vote, the Committee ratified those transactions. There were no open market operations in foreign currencies for the System's account during the intermeeting period. Since the Committee met in November, the Federal Reserve's total assets were about unchanged, at nearly $2.2 trillion, as the increase in the System's holdings of securities roughly matched a further decline in usage of the System's credit and liquidity facilities. The Manager noted that the System's holdings of securities will tend to decline gradually after the completion of the asset purchase programs, reflecting maturing issues and prepayments on holdings of MBS. The Manager noted that the Committee would likely wish to discuss in detail its policy for reinvesting the proceeds of maturing issues and prepayments; he proposed, as an interim approach, continuing the practice of not reinvesting the proceeds of maturing agency securities or MBS prepayments. Meeting participants supported that interim approach pending further discussion at future meetings. The staff presented another update on the continuing development of several tools that could be used to support a smooth withdrawal of policy accommodation at the appropriate time; these tools include executing reverse repurchase agreements (RRPs) on a large scale and implementing a term deposit facility (TDF). To further test its RRP capabilities, in early December, the Desk executed a few small RRPs with primary dealers, using both Treasury and agency debt as collateral. These transactions confirmed the operational capability to execute triparty RRPs on a larger scale if so directed by the Committee. The Desk was continuing to develop the capacity to conduct RRPs using agency MBS collateral and anticipated that this work would be completed by the spring. In addition, the Desk reported that it was exploring the operational issues associated with expanding potential counterparties for RRPs beyond the primary dealers. Staff also reported significant progress in developing and implementing a TDF. The staff noted that it planned to ask the Board to approve a Federal Register notice requesting public comments on a TDF and summarized the contents of the draft notice. The staff also briefed the Committee on recent developments regarding various Federal Reserve liquidity and credit facilities, including the Term Auction Facility (TAF), the primary credit program, and the Term Asset-Backed Securities Loan Facility (TALF). TAF auctions continued to be undersubscribed even as the Federal Reserve progressively reduced the total amount of funding available from the TAF. With the exception of the TALF, usage of the other facilities declined further as financial market conditions continued to improve. The TALF expanded modestly, supporting issuance of asset-backed securities collateralized by consumer, small business, and student loans as well as commercial mortgage-backed securities (CMBS). Indeed, over the intermeeting period, TALF lending supported the first new CMBS issue since June 2008. On November 17, the Board of Governors announced a reduction in the maximum maturity of loans available under the discount window's primary credit program from 90 days to 28 days, effective January 14, 2010. Participants agreed it would be useful to consider further steps the Federal Reserve might take to move toward normalization of its lending facilities at upcoming meetings, when the Committee plans to discuss alternative approaches to implementing monetary policy in the longer-run. Staff Review of the Economic Situation The information reviewed at the December 15-16 meeting suggested that the recovery in economic activity was gaining momentum. The pace of job losses slowed noticeably in recent months, and total hours worked increased in November; however, the unemployment rate remained quite elevated. Industrial production sustained the broad-based expansion that began in the third quarter, but capacity utilization remained very low. Consumer spending expanded solidly in October, reflecting in part a faster pace of motor vehicle sales. Both light vehicle sales and total retail sales rose again in November. Sales of new homes increased significantly in recent months, a development that, given the slow pace of construction, reduced the inventory of unsold new homes; sales of existing homes rose strongly. Spending on equipment and software continued to stabilize, but investment in nonresidential structures declined further as conditions in nonresidential real estate markets remained poor. Both imports and exports continued to recover from their depressed levels of earlier this year, and the U.S. trade deficit in September and October was wider than in earlier months. Although a jump in energy prices pushed up headline inflation somewhat, core consumer price inflation remained subdued. Data received over the intermeeting period suggested that the pace of job loss slowed considerably in recent months relative to the steep declines that occurred in the first half of the year. The average decline in private payrolls in October and November was much smaller than in the third quarter; that recent improvement was widespread across industries. The length of the average workweek for production and nonsupervisory workers increased in November; moreover, aggregate hours worked registered the first substantial increase since the recession began. The unemployment rate dropped in November but remained quite high, while the labor force participation rate continued to decrease. The four-week moving average of initial claims for unemployment benefits declined somewhat through early December. Continuing claims for unemployment insurance through regular state programs also moved down, but the average length of spells of unemployment continued to increase. After expanding briskly in the third quarter, industrial production increased further in October and November. The gains continued to be fairly broad based, and were particularly strong for consumer durables and materials. Business surveys suggested that factory output would advance further in the coming months. Capacity utilization rose again in November, but remained at a very low level by historical standards. Real personal consumption expenditures increased at a solid pace in October, with broad-based advances in both goods and services. The data for nominal retail sales in November showed continued widespread improvement, particularly at general merchandise stores, electronics and appliance stores, and nonstore retailers. Outlays for motor vehicles bounced back in October after a slump in September that followed the end of the "cash-for-clunkers" program in August. Sales of new light vehicles increased again in November. Real disposable personal income rose in October, reflecting modest gains in nominal labor income; moreover, the increase in real after-tax income during the spring and summer was revised up. The latest readings from indexes of consumer sentiment remained within the relatively low range that prevailed over the previous six months, apparently still weighed down by weak labor market conditions and prior declines in household net worth. Housing construction held fairly steady in recent months, while demand for housing continued to firm. Single-family housing starts remained roughly flat from June to November at levels only modestly above those reported earlier in the year. In the much smaller multifamily sector, where tight credit conditions persisted and vacancies stayed elevated, the average pace of starts in October and November decreased somewhat from the already very low rate in the third quarter. In contrast, sales of existing single-family homes increased significantly again in October. Sales of new homes also rose in October after two months of little change. With sales continuing to outpace construction, the inventory of unsold new homes declined to its lowest level in three years. The recent increases in sales likely reflected improved fundamentals: The average interest rate on 30-year conforming fixed-rate mortgages declined to less than 5 percent, and surveys suggested that households now expected home prices to be fairly stable over the next year. Although some house price indexes declined a little in September and October, they remained above the troughs reached last spring. Real spending on equipment and software was estimated to have risen slightly in the third quarter after falling sharply for more than a year. Increased outlays for transportation equipment and high-tech goods accounted for the stabilization. Outside of those sectors, spending declined a bit further in the third quarter, although not as steeply as it had earlier in the year. Shipments of transportation and high-tech equipment remained strong in October, but shipments of nondefense capital goods excluding those categories declined, and new orders fell sharply across a range of products. Business purchases of motor vehicles rose significantly again in November. Moreover, monthly surveys of business conditions, sentiment, and capital spending plans pointed to a moderate rise in business spending going forward. In contrast, conditions in the nonresidential construction sector generally remained quite poor. For instance, real outlays on structures outside of the drilling and mining sector plunged in the third quarter. Also in the third quarter, vacancy rates on nonresidential properties rose further, and property prices continued to fall amid difficult financing conditions. The book value of manufacturing and trade inventories excluding motor vehicles and parts increased in October for the first time in more than a year, even as the ratio of such inventories to sales declined further. Capital markets continued to become somewhat more supportive of business investment over the intermeeting period. In contrast, available data indicated that banks continued to raise spreads on business loans. The U.S. international trade deficit was somewhat wider in September and October than in previous months. Exports of goods and services increased sharply, and the gains were broadly distributed across most major categories of exports. After surging in September, imports flattened out in October, although the slowing almost entirely reflected reduced oil purchases. Most other categories of imports, including automotive goods, industrial supplies other than oil and gold, consumer goods, and capital goods, posted solid increases in the past two months. The most recent data from the advanced foreign economies suggested that they continue to emerge from their deep recessions. Real gross domestic product (GDP) rose in the third quarter in Japan, the euro area, and Canada, and the pace of contraction in the United Kingdom moderated substantially. The limited data relating to the fourth quarter suggested that economic activity advanced in all of those economies. Surveys of purchasing managers and indicators of business and consumer confidence generally improved further. Data for October indicated that trade volumes continued to rise in each of these economies, retail sales increased in the United Kingdom and stopped declining in the euro area, housing starts climbed in Canada, and industrial production increased in Japan for the eighth consecutive month. Third-quarter real GDP growth was surprisingly strong in several emerging market economies, most notably Mexico and India. In emerging Asia and in Latin America, indicators suggested that economic activity was expanding somewhat less rapidly, but still briskly, in the fourth quarter. Price pressures remained subdued in most of the advanced foreign economies, although headline inflation generally moved up. Headline inflation also increased in emerging Asia, generally from low levels, but declined further in Latin America, likely in part because of the recent appreciation of several Latin American currencies. In the United States, the latest data indicated that total consumer price inflation turned up in recent months, while core consumer price inflation remained subdued. The higher readings on headline consumer price inflation were the result of a rebound in energy prices. Core consumer prices increased modestly in October and were unchanged in November. Median year-ahead inflation expectations in the Reuters/University of Michigan Survey of Consumers declined in early December, and the same survey's measure of longer-term inflation expectations moved down to the lower end of the narrow range that prevailed over the previous few years. Revised data showed solid increases in hourly compensation in the second and third quarters, along with quite rapid productivity growth and a further decline in unit labor costs. Average hourly earnings of production and nonsupervisory workers increased modestly, on average, in October and November. Staff Review of the Financial Situation Market participants largely anticipated the decisions by the Federal Open Market Committee (FOMC) at the November meeting to keep the target range for the federal funds rate unchanged and to retain the "extended period" language in the accompanying statement. However, market participants took note of the Committee's explicit enumeration of the factors that were expected to continue to warrant this policy stance, and Eurodollar futures rates fell a bit on the release. In contrast, the announcement that the Federal Reserve would purchase only about $175 billion of agency debt securities had not been generally anticipated. Spreads on those securities widened a few basis points following the release, but declined, on net, over the intermeeting period. Incoming economic data, while somewhat better than expected, seemed to have little net effect on interest rate expectations. Indeed, the expected path of the federal funds rate shifted down somewhat over the intermeeting period. Consistent with the decrease in short-term interest rates, yields on 2-year nominal off-the-run Treasury securities declined slightly, on net, over the intermeeting period. In contrast, yields on nominal 10-year Treasury securities edged higher on balance. Inflation compensation based on 5-year Treasury inflation-protected securities (TIPS) increased, apparently owing in part to an announcement by the Treasury of a smaller-than-expected amount of issuance of TIPS next year. Five-year inflation compensation five years ahead also rose, and was near the upper end of its range in recent years. Conditions in short-term funding markets were little changed over the intermeeting period. Spreads between London interbank offered rates (Libor) and overnight index swap (OIS) rates at one- and three-month maturities were about flat; spreads at the six-month maturity narrowed somewhat further but remained above pre-crisis levels. Spreads on A2/P2-rated commercial paper (CP) and AA-rated asset-backed CP remained near their lows of the past two years. Indicators of functioning in the market for nom-inal Treasury securities--including trading volumes and liquidity premiums for the on-the-run 10-year note--were roughly stable. Liquidity conditions in the TIPS market showed further improvement. Year-end pressures in short-term funding markets, including the CP and bank funding markets, remained modest. However, high demand for Treasury bills maturing just past December 31 drove yields on such issues to zero in some recent auctions. Over the intermeeting period, broad stock price indexes increased further. The rise in share prices likely reflected the improvement in the economic outlook and strong third-quarter earnings, which led analysts to mark up their estimates of future earnings. The gains were widespread across industry sectors. However, financial stocks significantly underperformed the market, as investors continued to express concerns about the future profitability of the banking industry. Option-implied volatility on the S&P 500 index declined. The spread between an estimate of the expected real return on equity over the next 10 years and an estimate of the real 10-year Treasury yield--a rough gauge of the equity risk premium--remained about unchanged at a relatively high level. Yields on investment- and speculative-grade corporate bonds fell a little more than those on comparable-maturity nominal Treasury securities, leaving their spreads somewhat narrower. Bid-asked spreads for corporate bonds--a measure of the liquidity of such instruments--were about unchanged. Prices and bid-asked spreads in the secondary market for leveraged loans also were stable over the intermeeting period. Spreads on credit default swaps (CDS) for large bank holding companies narrowed a bit. Debt of the private domestic nonfinancial sector appeared to be declining again in the fourth quarter, as estimates suggested a further drop in household debt and a tick down in nonfinancial business debt. Consumer credit contracted for the ninth consecutive month in October, reflecting a steep decline in revolving credit that offset a small increase in nonrevolving credit. Issuance of consumer credit asset-backed securities rebounded in November from its subdued pace in October. Moreover, with support from the TALF, the first CMBS issue in nearly 18 months came to market. A few other CMBS deals were subsequently completed without support from the TALF. Business debt was held down in November by another drop in bank loans, as well as a decrease in CP outstanding, though the latter was concentrated among a few large firms. In contrast, gross issuance of investment- and speculative-grade bonds was robust in November. The federal government continued to issue debt at a brisk pace, and gross issuance of state and local government debt remained strong in November. Commercial bank credit decreased further in November, although the pace of decline slowed relative to recent months. Commercial and industrial (C&I) loans continued to drop, likely reflecting weak demand and a continued tightening of credit terms by banks. The Survey of Terms of Business Lending conducted in November indicated that the average C&I loan rate spread over comparable-maturity market instruments rose for the fifth consecutive survey. The runoff in commercial real estate loans continued, consistent with the further weakening of fundamentals in that sector. Bank loans to households rose, reflecting a slowdown in loan sales to the housing-related government-sponsored enterprises that resulted in a modest increase in banks' on-balance-sheet holdings of closed-end residential mortgages in November. However, home equity loans and consumer loans fell again. According to third-quarter Call Report data, unused loan commitments shrank for the seventh consecutive quarter, though the rate of decline slowed, especially for commitments to lend to businesses. The aggregate profitability of the banking sector turned positive in the third quarter, but most of the increase was due to strong earnings at a few large institutions. Credit quality appeared to worsen as delinquency and charge-off rates increased further for most major loan categories. Banks' regulatory capital ratios increased again as banks continued to raise equity and shrink their balance sheets. M2 expanded at a moderate rate in November. As was the case in recent months, liquid deposits grew rapidly, while small time deposits and retail money market mutual funds contracted, albeit at slightly slower paces. Currency declined somewhat in November as foreign demand for U.S. banknotes appeared to ebb, consistent with the continued stabilization in most global financial markets. Broad stock price indexes in major advanced foreign economies rose, although generally somewhat less than those in the United States. Stock price indexes in major emerging markets increased as well, particularly in Brazil and Mexico, amid generally rising commodity prices and a better-than-expected Mexican GDP report; Chinese stock prices also increased strongly. Long-term government bond yields declined in most advanced foreign economies, but increased in the United Kingdom. The dollar depreciated over much of the intermeeting period, but then reversed course following the release of better-than-expected U.S. data on employment and retail sales for November. On balance, the dollar ended the period up slightly against the major foreign currencies and down a little relative to the currencies of other important trading partners. Concerns about the potential for default by some sovereign borrowers rose over the intermeeting period. News that the Dubai government had requested a standstill on debts owed by Dubai World, a government-owned corporation, temporarily roiled some financial markets. However, those pressures eased as investors concluded that Dubai World's difficulties were likely to be isolated. Subsequently, the sovereign debt rating for Greece was lowered amid long-standing concerns over its public finances and a widening of its sovereign CDS spreads. Although the central banks of the major foreign industrial economies kept policy rates on hold, the Bank of England expanded its asset purchase program and the Bank of Japan announced a new secured lending facility. In contrast, the European Central Bank took some initial steps toward scaling back emergency lending. It announced that the one-year refinancing operation in December would be its last and that the cost of the funds provided would float with interest rates set in future refinancing operations rather than being fixed as in previous such operations. Staff Economic Outlook In the forecast prepared for the December FOMC meeting, the staff raised its projection for average real GDP growth in the second half of 2009 somewhat, and it also modestly increased its forecast for economic growth in 2010 and 2011. Better-than-expected data on employment, consumer spending, home sales, and industrial production received during the intermeeting period pointed to a somewhat stronger increase in real GDP in the current quarter than had previously been projected. In addition, the positive signal from the incoming data, along with the sizable upward revisions to household income in earlier quarters and more supportive financial market conditions, led to small upward adjustments to projected growth in real GDP over the rest of the forecast period. The staff again anticipated that the recovery would strengthen in 2010 and 2011, supported by further improvement in financial conditions and household balance sheets, continued recovery in the housing sector, growing household and business confidence, and accommodative monetary policy, even as the impetus to real activity from fiscal policy diminished. However, the projected pace of real output growth in 2010 and 2011 was expected to exceed that of potential output by only enough to produce a very gradual reduction in economic slack. The staff forecast for inflation was nearly unchanged. The staff interpreted the increases in prices of energy and nonmarket services that recently boosted consumer price inflation as largely transitory. Although the projected degree of slack in resource utilization over the next two years was a little lower than shown in the previous staff forecast, it was still quite substantial. Thus, the staff continued to project that core inflation would slow somewhat from its current pace over the next two years. Moreover, the staff expected that headline consumer price inflation would decline to about the same rate as core inflation in 2010 and 2011. Participants' Views on Current Conditions and the Economic Outlook In their discussion of the economic situation and outlook, meeting participants agreed that the incoming data and information received from business contacts suggested that economic growth was strengthening in the fourth quarter, that firms were reducing payrolls at a less rapid pace, and that downside risks to the outlook for economic growth had diminished a bit further. Although some of the recent data had been better than anticipated, most participants saw the incoming information as broadly in line with the projections for moderate growth and subdued inflation in 2010 that they had submitted just before the Committee's November 3-4 meeting; accordingly, their views on the economic outlook had not changed appreciably. Participants expected the economic recovery to continue, but, consistent with experience following previous financial crises, most anticipated that the pickup in output and employment growth would be rather slow relative to past recoveries from deep recessions. A moderate pace of expansion would imply slow improvement in the labor market next year, with unemployment declining only gradually. Participants agreed that underlying inflation currently was subdued and was likely to remain so for some time. Some noted the risk that, over the next couple of years, inflation could edge further below the rates they judged most consistent with the Federal Reserve's dual mandate for maximum employment and price stability; others saw inflation risks as tilted toward the upside in the medium term. A number of factors were expected to support near-term expansion in economic activity. Consumer spending appeared to be on a moderately rising trend, reflecting gains in after-tax income and wealth this year. Recent upward revisions to official estimates of the level of household income in recent quarters gave participants somewhat greater confidence that consumer spending would continue to expand. The housing sector showed continuing signs of improvement, though housing starts had leveled out after increasing earlier in the year and activity remained quite low. Businesses seemed to be reducing the pace of inventory reductions. The outlook for growth abroad had improved since earlier in the year, auguring well for U.S. exports. In addition, financial market conditions generally had become more supportive of economic growth. While these developments were positive, participants noted several factors that likely would continue to restrain the expansion in economic activity. Business contacts again emphasized they would be cautious in adding to payrolls and capital spending, even as demand for their products increases. Conditions in the commercial real estate (CRE) sector were still deteriorating. Bank credit had contracted further, and with many banks facing continuing loan losses, tight bank credit could continue to weigh on the spending of some households and businesses. Some participants remained concerned about the economy's ability to generate a self-sustaining recovery without government support. In particular, they noted the risk that improvements in the housing sector might be undercut next year as the Federal Reserve's purchases of MBS wind down, the homebuyer tax credits expire, and foreclosures and distress sales continue. Though the near-term outlook remains uncertain, participants generally thought the most likely outcome was that economic growth would gradually strengthen over the next two years as financial conditions improved further, leading to more-substantial increases in resource utilization. Financial market conditions were generally regarded as having become more supportive of continued economic recovery during the intermeeting period: Equity prices rose further, private credit spreads narrowed somewhat, and financial markets generally continued to function significantly better than early in the year. Participants noted, however, that securitization markets were still substantially impaired. In general, U.S. asset values did not seem out of line with improving fundamentals. While investors evidently had become less cautious and more willing to bear risk, they appeared to be discriminating among risky assets. Banks were raising new capital and in some cases paying back funds received from the Troubled Asset Relief Program. Bank loans, however, continued to contract sharply in all categories, reflecting lack of demand, deterioration in potential borrowers' credit quality, uncertainty about the economic outlook, and banks' concerns about their own capital positions. With rising levels of nonperforming loans expected to be a continuing source of stress, and with many regional and small banks vulnerable to the deteriorating performance of CRE loans, bank lending terms and standards were seen as likely to remain tight. Participants again noted the contrast between large and small firms' access to financing. Large firms that can issue debt in the markets appeared to have relatively little difficulty obtaining credit. In contrast, smaller firms, which tend to be more dependent on commercial banks for financing, reportedly faced substantial constraints in gaining access to credit. While survey evidence suggested that small businesses considered weak demand to be a larger problem than access to credit, participants saw limited credit availability as a potential constraint on future investment and hiring by small businesses, which normally are a significant source of employment growth in recoveries. The weakness in labor markets continued to be an important concern to meeting participants, who generally expected unemployment to remain elevated for quite some time. The unemployment rate was not the only indicator pointing to substantial slack in labor markets: The employment-to-population ratio had fallen to a 25-year low, and aggregate hours of production workers had dropped more than during the 1981-82 recession. Although the November employment report was considerably better than anticipated, several participants observed that more than one good report would be needed to provide convincing evidence of recovery in the labor market. Participants also noted that the slowing pace of employment declines mainly reflected a diminished pace of layoffs; few firms were hiring. Moreover, the unusually large fraction of those individuals with jobs who were working part time for economic reasons, as well as the uncommonly low level of the average workweek, pointed to only a gradual decline in unemployment as the economic recovery proceeded. Indeed, many business contacts again reported that they would be cautious in their hiring, saying they expected to meet any near-term increase in demand by raising their existing employees' hours and boosting productivity, thus delaying the need to add employees. The necessity of reallocating labor across sectors as the recovery proceeds, as well as the loss of skills caused by high levels of long-term unemployment and permanent separations, also could limit the pace of employment gains. Nonetheless, the reported rise in employment of temporary workers in recent months could presage a broader increase in job growth and thus was a welcome development. The prognosis for labor markets remained an important factor in the outlook for consumer spending. Recent data on household expenditures were encouraging. Retail sales increased, spurred by price discounting. The Bureau of Economic Analysis revised up its estimates of the level of real disposable income--and thus of the personal saving rate--in the second and third quarters of this year. Those revisions, along with recent gains in equity prices, suggested a smaller probability that households would reduce spending to rebuild their savings more rapidly. However, uncertain job prospects, modest growth in real incomes, tight credit, and wealth levels that remained relatively low despite this year’s rise in equity prices and stabilization in house prices were seen as likely to weigh on consumer confidence and the growth of consumer spending for some time to come. Anecdotal evidence on consumer spending in this year's holiday season was mixed. Participants noted that firms had made substantial progress in reducing inventories toward desired levels and were cutting stocks at a slower pace than earlier in the year. This adjustment likely was making an important contribution to economic growth in the fourth quarter, and participants expected that it would do so into 2010 as well. The combination of rising consumer spending, slower destocking, and rising goods production was reflected in reports from major transportation companies that shipping volumes were up. Investment in equipment and software appeared to have stabilized, and recent data on new orders continued to point to some pickup next year. Even so, many participants expressed the view that cautious business sentiment, together with low industrial utilization rates, was likely to keep new capital spending subdued until firms became more confident about the durability of increases in demand. Many also noted widespread reports from business contacts that uncertainties about health-care, tax, and environmental policies were adding to businesses' reluctance to commit to higher capital spending. CRE activity continued to fall markedly in most parts of the country as a result of deteriorating fundamentals, including declining occupancy and rental rates, and very tight credit conditions. Prospects for nonresidential construction remained weak. In the residential real estate sector, home sales and construction had risen relative to the very low levels reported in the spring; moreover, house prices appeared to be stabilizing and in some areas had reportedly moved higher. Generally, the outlook was for gains in housing activity to continue. However, some participants still viewed the improved outlook as quite tentative and again pointed to potential sources of softness, including the termination next year of the temporary tax credits for homebuyers and the downward pressure that further increases in foreclosures could put on house prices. Moreover, mortgage markets could come under pressure as the Federal Reserve's agency MBS purchases wind down. Stronger foreign economic activity, especially in the emerging market economies in Asia, as well as the partial reversal this year of the dollar's appreciation during the latter part of 2008, was providing further support to U.S. exports, including agricultural exports. Further improvements in foreign economies would likely buoy U.S. exports going forward, but import growth would also strengthen as the recovery took hold in the United States. Participants noted that any tendency for dollar depreciation to put significant upward pressure on inflation would bear close watching. Most participants anticipated that substantial slack in labor and product markets, along with well-anchored inflation expectations, would keep inflation subdued in the near term, although they had differing views as to the relative importance of those two factors. The decelerations in wages and unit labor costs this year, and the accompanying deceleration in marginal costs, were cited as factors putting downward pressure on inflation. Moreover, anecdotal evidence suggested that most firms had little ability to raise their prices in the current economic environment. Some participants noted, however, that rising prices of oil and other commodities, along with increases in import prices, could boost inflation pressures going forward. Overall, many participants viewed the risks to their inflation outlooks as being roughly balanced. Some saw inflation risks as tilted to the downside, reflecting the quite elevated level of economic slack and the possibility that inflation expectations could begin to decline in response to the low level of actual inflation. But others felt that inflation risks were tilted to the upside, particularly in the medium term, because of the possibility that inflation expectations could rise as a result of the public's concerns about extraordinary monetary policy stimulus and large federal budget deficits. Moreover, a few participants noted that banks might seek, as the economy improves, to reduce their excess reserves quickly and substantially by purchasing securities or by easing credit standards and expanding their lending. A rapid shift, if not offset by Federal Reserve actions, could give excessive impetus to spending and potentially result in expected and actual inflation higher than would be consistent with price stability. To keep inflation expectations anchored, all participants agreed that monetary policy would need to be responsive to any significant improvement or worsening in the economic outlook and that the Federal Reserve would need to continue to clearly communicate its ability and intent to begin withdrawing monetary policy accommodation at the appropriate time and pace. In the Committee's discussion of monetary policy for the period ahead, all members agreed that no changes to the Committee's large-scale asset purchase programs, or to its target range for the federal funds rate, were warranted at this meeting, inasmuch as the economic outlook had changed little since the November meeting. Accordingly, the Committee affirmed its intention to purchase $1.25 trillion of agency MBS and about $175 billion of agency debt by the end of the first quarter of 2010 and to gradually slow the pace of these purchases to promote a smooth transition in markets. The Committee emphasized that it would continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. A few members noted that resource slack was expected to diminish only slowly and observed that it might become desirable at some point in the future to provide more policy stimulus by expanding the planned scale of the Committee's large-scale asset purchases and continuing them beyond the first quarter, especially if the outlook for economic growth were to weaken or if mortgage market functioning were to deteriorate. One member thought that the improvement in financial market conditions and the economic outlook suggested that the quantity of planned asset purchases could be scaled back, and that it might become appropriate to begin reducing the Federal Reserve's holdings of longer-term assets if the recovery gains strength over time. The Committee maintained the federal funds target range at 0 to 1/4 percent and, based on the outlook for a slow economic recovery, decided to reiterate its anticipation that economic conditions, including low levels of resource utilization, subdued inflation trends, and stable inflation expectations, were likely to warrant exceptionally low rates for an extended period. Although members generally saw little risk that maintaining very low short-term interest rates could raise inflation expectations or create instability in asset markets, they noted that it was important to remain alert to these risks. All agreed that the path of short-term rates going forward would depend on the evolution of the economic outlook. Committee members and Board members agreed that there had been substantial improvements in the functioning of financial markets; accordingly they agreed that the statement to be released following the meeting should indicate an anticipation that most of the Federal Reserve's special liquidity facilities will expire on February 1, 2010; these facilities include the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility. Committee members also agreed to announce that the Federal Reserve will be working with its central bank counterparties to close its temporary liquidity swap arrangements by February 1. In addition, the statement would announce an expectation that amounts provided under the Term Auction Facility will continue to be scaled back in early 2010, and that the anticipated expiration dates for the Term Asset-Backed Securities Loan Facility remained June 30, 2010, for loans backed by new-issue CMBS, and March 31, 2010, for loans backed by all other types of collateral. Members emphasized that they were prepared to modify these plans if necessary to support financial stability and economic growth. In that context, several members noted that the TALF was still providing important support for securitization markets, particularly the CMBS market, and that improvements in the functioning of securitization markets were lagging behind those in other financial markets. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive:  "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to purchase agency debt and agency MBS during the intermeeting period with the aim of providing support to private credit markets and economic activity. The timing and pace of these purchases should depend on conditions in the markets for such securities and on a broader assessment of private credit market conditions. The Desk is expected to execute purchases of about $175 billion in housing-related agency debt and about $1.25 trillion of agency MBS by the end of the first quarter of 2010. The Desk is expected to gradually slow the pace of these purchases as they near completion. The Committee anticipates that outright purchases of securities will cause the size of the Federal Reserve's balance sheet to expand significantly in coming months. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability." The vote encompassed approval of the statement below to be released at 2:15 p.m.:  "Information received since the Federal Open Market Committee met in November suggests that economic activity has continued to pick up and that the deterioration in the labor market is abating. The housing sector has shown some signs of improvement over recent months. Household spending appears to be expanding at a moderate rate, though it remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment, though at a slower pace, and remain reluctant to add to payrolls; they continue to make progress in bringing inventory stocks into better alignment with sales. Financial market conditions have become more supportive of economic growth. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability. With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve is in the process of purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. In order to promote a smooth transition in markets, the Committee is gradually slowing the pace of these purchases, and it anticipates that these transactions will be executed by the end of the first quarter of 2010. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. In light of ongoing improvements in the functioning of financial markets, the Committee and the Board of Governors anticipate that most of the Federal Reserve's special liquidity facilities will expire on February 1, 2010, consistent with the Federal Reserve's announcement of June 25, 2009. These facilities include the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility. The Federal Reserve will also be working with its central bank counterparties to close its temporary liquidity swap arrangements by February 1. The Federal Reserve expects that amounts provided under the Term Auction Facility will continue to be scaled back in early 2010. The anticipated expiration dates for the Term Asset-Backed Securities Loan Facility remain set at June 30, 2010, for loans backed by new-issue commercial mortgage-backed securities and March 31, 2010, for loans backed by all other types of collateral. The Federal Reserve is prepared to modify these plans if necessary to support financial stability and economic growth." Voting for this action: Messrs. Bernanke and Dudley, Ms. Duke, Messrs. Evans, Kohn, Lacker, Lockhart, Tarullo, and Warsh, and Ms. Yellen. Voting against this action: None. Following the Committee's policy decision, staff gave several presentations on the key determinants of inflation dynamics. Theoretical and empirical research indicates that inflation can respond to deviations of economic activity from its longer-run sustainable path. However, in some theoretical frameworks, the connection between resource slack and inflation depends on the nature of the shock and its impact on marginal costs and markups. Moreover, estimates of the magnitude of slack and its effect on inflation are sensitive to the details of the analytical framework and the statistical methodology used in each study. While theory suggests that the degree of slack prevailing in foreign economies could affect domestic inflation, empirical evidence on the importance of such an effect was mixed. Evidence suggested that sizable shifts in the longer-run inflation expectations of households and firms had influenced the evolution of inflation over previous decades; in contrast, the anchoring of inflation expectations in recent years likely had damped somewhat the response of actual inflation to the recent economic downturn and to fluctuations in the prices of energy and other commodities. In discussing these issues, participants noted that they bear in mind the shocks hitting the economy and regularly monitor more than one measure of resource slack as they assess the outlook for economic activity and inflation. They also noted the importance of formulating monetary policy in ways that would work well across a range of possible economic structures rather than relying on any one analytical framework. Finally, they underscored the importance of keeping longer-run inflation expectations firmly anchored to help achieve the Federal Reserve's dual mandate for maximum employment and price stability. It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, January 26-27, 2010. The meeting adjourned at 1:00 p.m. on December 16, 2009. Notation Votes By notation vote completed on November 23, 2009, the Committee unanimously approved the minutes of the FOMC meeting held on November 3-4, 2009. By notation vote completed on November 24, 2009, the Committee unanimously approved the following resolution: "The Federal Open Market Committee authorizes the Federal Reserve Bank of New York to conduct reverse repo transactions involving U.S. Government securities, and securities that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the United States, for the purpose of helping to ensure the readiness of the Federal Reserve's tools for absorbing bank reserves. The reverse repo transactions authorized in this resolution shall have terms to maturity of 20 business days or less and the total amount of all transactions outstanding at a given time shall be $5 billion or less."   _____________________________ Brian F. Madigan Secretary 1. Attended Tuesday's session only. Return to text 2. Attended the portion of the meeting related to inflation dynamics. Return to text 3. Attended Wednesday's session only. Return to text Return to top

2009-12-15

Statement

Information received since the Federal Open Market Committee met in November suggests that economic activity has continued to pick up and that the deterioration in the labor market is abating. The housing sector has shown some signs of improvement over recent months. Household spending appears to be expanding at a moderate rate, though it remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment, though at a slower pace, and remain reluctant to add to payrolls; they continue to make progress in bringing inventory stocks into better alignment with sales. Financial market conditions have become more supportive of economic growth. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability. With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve is in the process of purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. In order to promote a smooth transition in markets, the Committee is gradually slowing the pace of these purchases, and it anticipates that these transactions will be executed by the end of the first quarter of 2010. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. In light of ongoing improvements in the functioning of financial markets, the Committee and the Board of Governors anticipate that most of the Federal Reserve’s special liquidity facilities will expire on February 1, 2010, consistent with the Federal Reserve’s announcement of June 25, 2009. These facilities include the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility. The Federal Reserve will also be working with its central bank counterparties to close its temporary liquidity swap arrangements by February 1. The Federal Reserve expects that amounts provided under the Term Auction Facility will continue to be scaled back in early 2010. The anticipated expiration dates for the Term Asset-Backed Securities Loan Facility remain set at June 30, 2010, for loans backed by new-issue commercial mortgage-backed securities and March 31, 2010, for loans backed by all other types of collateral. The Federal Reserve is prepared to modify these plans if necessary to support financial stability and economic growth. Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

2009-11-24

Minute

A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held in the offices of the Board of Governors in Washington, D.C., on Tuesday, November 3, 2009, at 2:00 p.m. and continued on Wednesday, November 4, 2009, at 9:00 a.m. PRESENT:Mr. Bernanke, ChairmanMr. Dudley, Vice ChairmanMs. DukeMr. EvansMr. KohnMr. LackerMr. LockhartMr. Tarullo Mr. WarshMs. Yellen Mr. Bullard, Mr. Hoenig, Ms. Pianalto, and Mr. Rosengren, Alternate Members of the Federal Open Market Committee Messrs. Fisher, Kocherlakota, and Plosser, Presidents of the Federal Reserve Banks of Dallas, Minneapolis, and Philadelphia, respectively Mr. Madigan, Secretary and EconomistMr. Luecke, Assistant SecretaryMr. Skidmore, Assistant SecretaryMs. Smith, Assistant SecretaryMr. Alvarez, General CounselMr. Baxter, Deputy General CounselMr. Sheets, Economist Mr. Stockton, Economist Messrs. Altig, Clouse, Connors, Kamin, Slifman, Sullivan, Wilcox, and Williams, Associate Economists Mr. Sack, Manager, System Open Market Account Ms. Johnson, Secretary of the Board, Office of the Secretary, Board of Governors Mr. Frierson, Deputy Secretary, Office of the Secretary, Board of Governors Mr. Struckmeyer, Deputy Staff Director, Office of the Staff Director for Management, Board of Governors Mr. English, Deputy Director, Division of Monetary Affairs, Board of Governors Ms. Robertson, Assistant to the Board, Office of Board Members, Board of Governors Ms. Edwards, Messrs. Levin and Nelson, Senior Associate Directors, Division of Monetary Affairs, Board of Governors; Messrs. Reifschneider, and Wascher, Senior Associate Directors, Division of Research and Statistics, Board of Governors Mr. Leahy,1 Associate Director, Division of International Finance, Board of Governors Mr. Palumbo, Deputy Associate Director, Division of Research and Statistics, Board of Governors Mr. Small, Project Manager, Division of Monetary Affairs, Board of Governors Ms. Ihrig, Section Chief, Division of Monetary Affairs, Board of Governors Ms. Low, Open Market Secretariat Specialist, Division of Monetary Affairs, Board of Governors Mr. Williams, Records Management Analyst, Division of Monetary Affairs, Board of Governors Ms. Holcomb, First Vice President, Federal Reserve Bank of Dallas Messrs. Fuhrer and Sniderman, Executive Vice Presidents, Federal Reserve Banks of Boston and Cleveland, respectively Mr. Barkema, Mses. Mester and Mosser, and Mr. Waller, Senior Vice Presidents, Federal Reserve Banks of Kansas City, Philadelphia, New York, and St. Louis, respectively Mr. Weber, Senior Research Officer, Federal Reserve Bank of Minneapolis Mr. Burke and Ms. Yucel, Vice Presidents, Federal Reserve Banks of New York and Dallas, respectively Ms. Sbordone and Mr. Sill, Assistant Vice Presidents, Federal Reserve Banks of New York and Philadelphia, respectively Mr. Hetzel, Senior Economist, Federal Reserve Bank of Richmond Developments in Financial Markets and the Federal Reserve's Balance SheetThe Manager of the System Open Market Account reported on recent developments in domestic and foreign financial markets. The Manager also reported on System open market operations in Treasury securities, agency debt, and agency mortgage-backed securities (MBS) since the Committee's September 22-23 meeting. By unanimous vote, the Committee ratified those transactions. There were no open market operations in foreign currencies for the System's account during the intermeeting period. Since the Committee met in September, the Federal Reserve's total assets were about unchanged, on balance, at approximately $2.2 trillion, as the increase in the System's holdings of securities roughly matched a further decline in usage of the System's credit and liquidity facilities. The Manager noted that, as of October 30, $300 billion in Treasury securities had been purchased, as directed by the Committee. Overall, the Treasury market had recovered substantially from the strains during the financial crisis, and the Manager reported that the completion of the Federal Reserve's purchase program did not appear to have led to any significant upward pressure on Treasury yields or to any notable deterioration in Treasury market functioning. There was little evidence, to date, of a buildup in year-end funding pressures, although demand for Treasury bills with maturities extending just beyond the year-end seemed to be elevated. The Manager noted that the recent path of purchases of agency debt was consistent with buying a cumulative amount of $175 billion by the end of the first quarter of 2010. The staff briefed the Committee on recent developments regarding various Federal Reserve liquidity and credit facilities, including the Term Auction Facility (TAF), the primary credit program, the Term Asset-Backed Securities Loan Facility (TALF), and the swap lines with foreign central banks. Usage of these facilities had been declining in recent months as financial market conditions continued to improve. On September 24, the Board of Governors announced a gradual reduction in amounts to be auctioned under the TAF through January and indicated that auctions of credit with maturities longer than 28 days would be phased out. The staff reviewed the changes that had been made since the onset of the crisis to the terms of the primary credit program, including loan maturities and interest rates. The staff noted that reducing the maximum maturity of loans available under the primary credit program from 90 days to 28 days would represent another step toward normalization of the Federal Reserve's policy-implementation framework and would align the maximum maturities of the primary credit program with those under the TAF, but no action on this matter was taken by the Board at this meeting. Regarding the TALF, the staff indicated that auto and credit card asset-backed security issuance was increasingly being funded by non-TALF sources; however, commercial MBS remained more dependent on TALF financing. The staff presented another update on the continuing development of several tools that could help support a smooth withdrawal of policy accommodation at the appropriate time. These measures include executing reverse repurchase agreements (RPs) on a large scale, potentially with counterparties other than the primary dealers; implementing a term deposit facility, available to depository institutions, to reduce the supply of reserve balances; and taking steps to tighten the link between the interest rate paid on reserve balances held at the Federal Reserve Banks and the federal funds rate. The staff had made considerable further progress on these tools. Participants expressed confidence that the Committee would be in a position to remove policy accommodation when appropriate by raising the rate of interest paid on excess reserves and by employing reserve-management tools such as reverse RPs, term deposits, and, if desirable, asset sales. Completing the operational work necessary to establish reverse RPs and term deposits as tools that can drain large volumes of reserves was viewed as an important near-term objective. Participants anticipated that the Federal Reserve would conduct tests of these tools, but they stressed that such testing would not imply that these tools would be employed for policy purposes any time soon. Participants expressed a range of views about how the Committee might use its various tools in combination to foster most effectively its dual objectives of maximum employment and price stability. As part of the Committee's strategy for eventual exit from the period of extraordinary policy accommodation, several participants thought that asset sales could be a useful tool to reduce the size of the Federal Reserve's balance sheet and lower the level of reserve balances, either prior to or concurrently with increasing the policy rate. In their view, such sales would help reinforce the effectiveness of paying interest on excess reserves as an instrument for firming policy at the appropriate time and would help quicken the restoration of a balance sheet composition in which Treasury securities were the predominant asset. Other participants had reservations about asset sales--especially in advance of a decision to raise policy interest rates--and noted that such sales might elicit sharp increases in longer-term interest rates that could undermine attainment of the Committee's goals. Furthermore, they believed that other reserve management tools such as reverse RPs and term deposits would likely be sufficient to implement an appropriate exit strategy and that assets could be allowed to run off over time, reflecting prepayments and the maturation of issues. Participants agreed to continue to evaluate various potential policy-implementation tools and the possible combinations and sequences in which they might be used. They also agreed that it would be important to develop communication approaches for clearly explaining to the public the use of these tools and the Committee's exit strategy more broadly. Staff Review of the Economic SituationThe information reviewed at the November 3-4 meeting suggested that overall economic activity continued to rise in recent months. Manufacturers increased production in September for the third consecutive month. The gradual recovery in construction of single-family homes from its extremely low level earlier in the year continued, and home sales increased in the third quarter. Although consumer spending on motor vehicles declined in September after the expiration of government rebates, other household spending rose. Outlays for equipment and software (E&S) appeared to be stabilizing. However, the labor market weakened further, and business spending on nonresidential structures continued to decline. Meanwhile, consumer price inflation remained subdued in recent months. The labor market continued to weaken in September, but the pace of deterioration lessened from that seen earlier in the year. Job losses remained widespread across industries. The length of the average workweek for production and nonsupervisory workers decreased, and the index of aggregate hours worked for this group fell, albeit more slowly than earlier in the year. In the household survey, the unemployment rate rose in September to 9.8 percent, and the labor force participation rate fell to its lowest level of the year. Continuing claims for unemployment insurance through regular state programs declined through early October, but total claims, including those for extended and emergency benefits, remained high. Industrial production rose in September for the third consecutive month. A substantial portion of the third-quarter gain was directly attributable to a rebound in motor vehicle assemblies and related parts production, but increases in production were widespread across the industrial sector. Indicators from business surveys suggested that there would be further gains in factory output over the near term. Nevertheless, considerable slack remained in the manufacturing sector, as the factory utilization rate for September was up only a bit from its historical low earlier this year. For the third quarter as a whole, real personal consumption expenditures (PCE) rose at a solid rate, with noticeable increases in motor vehicles, furniture, electronics, and other durable goods. However, real outlays declined in September after a sharp increase in August. The monthly pattern in expenditures was significantly affected by swings in motor vehicle sales during and after the government's "cash-for-clunkers" program. Real disposable personal income fell for the fourth consecutive month in September, reflecting the weakness in the labor market. Poor labor market conditions and prior declines in household net worth appeared to have weighed on consumer sentiment, and the October Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS) suggested that many banking institutions continued to tighten standards for consumer lending in the third quarter. The housing sector continued to recover, on balance. Although single-family starts were about flat in September, the number of starts was well above the record low reached in the first quarter of the year. In the much smaller multifamily sector, where tight credit conditions persisted and vacancies remained elevated, starts were about unchanged. Sales of new homes, although down a bit in September, rose over the third quarter as a whole. The inventory of unsold new homes declined further, as sales outpaced construction. Sales of existing single-family homes increased in September and for the quarter as a whole, and recent resale activity appeared to be driven primarily by transactions of nondistressed properties. The average interest rate on 30-year conforming fixed-rate mortgages remained very low over the intermeeting period. Although some house price indexes had risen in recent months, such indexes remained below year-earlier levels. Real spending on E&S appeared to have stabilized in the third quarter. Real business outlays on high-tech E&S increased modestly further, outlays for aircraft posted another gain, and business investment in motor vehicles and other areas was down only slightly. The improvements in a number of the fundamental determinants of investment in E&S, including a decline in the cost of capital and a rise in business output, suggested further, albeit sluggish, gains in spending over the next few quarters. The responses to the October SLOOS indicated that banks continued to tighten standards on commercial and industrial (C&I) loans to firms. Meanwhile, conditions in the nonresidential construction sector generally remained quite poor. The recent trend in architectural billings was consistent with further declines in nonresidential construction, and employment in the sector continued to decline. The October SLOOS suggested that financing for new construction projects was very difficult for businesses to obtain. The Bureau of Economic Analysis estimated that businesses continued to liquidate inventories in the third quarter, but at a slower rate than in the preceding quarter. In August, the U.S. international trade deficit narrowed, as exports edged up and imports declined, but it remained wider than it had been at its recent low point in May. The increase in exports of goods and services was held down by a sharp drop in the volatile aircraft category. The decline in imports of goods and services was led by a lower volume of imported oil. In contrast, imports of machinery, automotive products, and industrial supplies increased. Indicators of economic activity in the advanced foreign economies during the third quarter were mixed, but consistent with economic recovery in the aggregate. In most countries, purchasing managers surveys were at levels consistent with expansion, and many indicators of consumer and business confidence continued to show improvement. Economic indicators were strongest in Japan and the euro area, where industrial production rebounded sharply. In contrast, real gross domestic product (GDP) contracted in the United Kingdom in the third quarter, and real GDP in Canada edged down in July and August. In most emerging market economies, recent data showed that economic recovery continued in the third quarter. Real GDP increased strongly in China, Korea, and Singapore, and the recovery in Brazil continued. In Mexico, available data suggested that activity had begun to expand after several quarters of contraction. Across most of the major foreign economies, price pressures remained subdued. Twelve-month inflation remained elevated but declined further in Mexico and Brazil. In the United States, recent monthly data indicated that consumer price inflation remained subdued. The PCE price index moved up only a bit in September as increases in energy prices were largely offset by declines in food prices. Core PCE prices also edged up during the month. Gasoline prices rose again in October. Median year-ahead inflation expectations in the final October Reuters/University of Michigan Surveys of Consumers increased, remaining higher than at the turn of the year, but longer-term inflation expectations from this survey were about unchanged. Measures of labor compensation rose moderately in the third quarter after decelerating significantly in the first half of the year. The employment cost index for wages and salaries was boosted by increases in several industry categories that might have been affected by the rise in the minimum wage in July. Output per hour rose sharply in the second and third quarters, contributing to a sizable decline in unit labor costs so far this year. Staff Review of the Financial SituationMarket participants largely anticipated the decisions by the Federal Open Market Committee (FOMC) at the September meeting to leave the target range for the federal funds rate unchanged and to extend the Federal Reserve's purchases of agency MBS and agency debt through the end of the first quarter of 2010 to allow for a gradual reduction in the pace of these purchases. The announcement of the Committee's intent to purchase the full $1.25 trillion of agency MBS securities reduced some uncertainty about the cumulative amount of these purchases. After the release of the statement, investors marked down their expected path for the federal funds rate slightly; over subsequent weeks, that initial reaction was largely reversed so that, on balance, the expected path appeared to change little over the intermeeting period. Yields on nominal Treasury securities were about unchanged on net. Inflation compensation based on five-year Treasury inflation-protected securities (TIPS) rose over the intermeeting period, apparently owing in part to an increase in oil and other commodity prices, while five-year inflation compensation five years ahead was little changed. Overall conditions in short-term funding markets eased a bit further during the intermeeting period. Spreads between London interbank offered rates (Libor) and overnight index swap (OIS) rates at the one- and three-month maturities were about unchanged and were near their pre-crisis levels. Spreads at the six-month maturity narrowed but remained elevated. Spreads on A2/P2-rated commercial paper (CP) and AA-rated asset-backed CP remained at the lower ends of their respective ranges over the past two years. Indicators of Treasury market functioning, including on-the-run liquidity premiums for the 10-year Treasury note and trading volumes in both the nominal and TIPS markets, showed some signs of improvement over the intermeeting period, but trading conditions remained somewhat impaired. Year-end pressures in funding markets generally appeared modest. However, some evidence pointed to increased demand for Treasury securities that mature soon after the turn of the year. Broad stock price indexes were about unchanged, on net, over the intermeeting period despite initial third-quarter earnings reports that mostly beat analysts' forecasts. Option-implied volatility on the S&P 500 index moved up slightly. The spread between an estimate of the expected real return on equity over the next 10 years for S&P 500 firms and an estimate of the real 10-year Treasury yield--a rough gauge of the equity risk premium--remained elevated. Corporate bond spreads narrowed further as yields on investment- and speculative-grade corporate bonds decreased more than those on comparable-maturity Treasury securities. Bid-asked spreads for corporate bonds--a measure of liquidity in this market--remained at moderate levels. Conditions in the secondary market for leveraged syndicated loans continued to improve, as secondary-market prices rose and bid-asked spreads narrowed. Investor sentiment toward the banking sector appeared to deteriorate over the intermeeting period. Bank share prices fell, with equity prices for large banks declining more than those for regional and smaller banks. Credit default swap spreads for large bank holding companies were about flat, but they widened for regional and smaller banking organizations. Market participants reportedly remained concerned about the earnings prospects for banks in an environment of weak economic activity and rising loan losses. Debt of the private domestic nonfinancial sector appeared to have declined again in the third quarter, as estimates suggested that household debt edged down and nonfinancial business debt decreased. Consumer credit contracted for the seventh consecutive month in August, reflecting declines in both revolving and nonrevolving credit; issuance of consumer credit asset-backed securities also fell. Gross issuance of bonds by investment-grade nonfinancial corporations slowed somewhat in October, even as speculative-grade firms continued to issue bonds at a robust pace. CP outstanding increased, though gains were concentrated at a few large issuers. Bank loans continued to contract rapidly. In contrast, the federal government continued to issue debt at a brisk pace, and gross issuance of state and local government debt remained strong in October. Bank credit declined in September and in the first half of October, as the contraction in C&I loans contributed importantly to a further decline in total loans over the period. According to the SLOOS, bank lending standards and terms tightened further and demand continued to decline, on net, for most types of loans in the third quarter. Commercial real estate (CRE) loans also continued to decrease, reportedly because of widespread paydowns and charge-offs. In addition, residential mortgage loans on banks' books fell, and revolving home equity loans and consumer loans also contracted. The pace of decline in total loans at large banks continued to exceed that at smaller banks. The allowance for loan and lease losses rose further at large banks in September, but it was about unchanged at small banks. M2 appeared to have expanded at a moderate rate in September and October. While liquid deposits rose rapidly, small time deposits and retail money market mutual funds continued to contract. Meanwhile, currency increased amid moderate demand for U.S. currency from abroad. Stock indexes fell over the intermeeting period in most major industrial economies, while 10-year sovereign yields declined in Europe and were little changed in Japan and Canada. Equity prices were mixed in emerging markets, and credit spreads on emerging market sovereign debt edged up. The trade-weighted index of the foreign exchange value of the dollar was little changed over the intermeeting period. The Reserve Bank of Australia and Norges Bank raised their policy rates, while most other central banks left their respective policy rates unchanged over the intermeeting period. The European Central Bank, the Bank of England, and the Bank of Japan continued implementing their special liquidity and asset purchase programs, although Bank of Japan officials indicated they would let some credit-easing programs expire at the end of the year. Staff Economic OutlookIn the forecast prepared for the November FOMC meeting, the staff raised its projection for real GDP growth over the second half of 2009 but left the forecast for output growth in 2010 and 2011 roughly unchanged. The spending and production data received during the intermeeting period suggested that economic activity, especially household spending, was a little stronger in the summer than previously estimated. Also, industrial production increased more than had been anticipated at the September meeting. But with labor market conditions somewhat weaker than anticipated, earlier declines in wealth still weighing on household balance sheets, and measures of consumer sentiment relatively low, the staff did not take much signal from the recent unexpected strength in spending and output. Indeed, the staff boosted its projection for the unemployment rate over the next several years. Still, the staff continued to believe that several factors that were restraining spending would gradually fade. The staff anticipated that the strengthening of the recovery in real output during 2010 and 2011 would be supported by an ongoing improvement in financial conditions and household balance sheets, continued recovery in the housing sector, improved household and business confidence, and accommodative monetary policy even as the impetus to real activity from fiscal policy diminished. The staff forecast for inflation was little changed from the September meeting. Although oil prices moved higher, likely boosting near-term inflation, the staff also revised up its estimate of the degree of slack in the economy, leaving the forecast for total and core PCE inflation over the next two years little changed. With significant underutilization of resources expected to persist for several years, the staff continued to project that core inflation would slow somewhat further over the next two years. Participants' Views on Current Conditions and the Economic OutlookIn conjunction with this FOMC meeting, all meeting participants--the five members of the Board of Governors and the presidents of the 12 Federal Reserve Banks--provided projections for economic growth, the unemployment rate, and consumer price inflation for each year from 2009 through 2012 and over a longer horizon. Longer-run projections represent each participant's assessment of the rate to which each variable would be expected to converge over time under appropriate monetary policy and in the absence of further shocks. Participants' forecasts through 2012 and over the longer run are described in the Summary of Economic Projections, which is attached as an addendum to these minutes. In the meeting participants' discussion of the economic situation and outlook, they agreed that the incoming data and information received from business contacts suggested that economic activity was picking up as anticipated, with output continuing to expand in the fourth quarter. A number of factors were expected to support near-term growth: Business inventories were being brought into better alignment with sales, and the pace of inventory runoff was slowing; activity in the housing sector appeared to be turning up, and house prices seemed to be leveling out or beginning to rise by some measures; consumer spending appeared to be rising even apart from the effects of fiscal incentives to purchase autos; the outlook for growth abroad had improved since earlier in the year, auguring well for U.S. exports; and U.S. and global financial market conditions, while roughly unchanged over the intermeeting period, were substantially better than earlier in the year. Above-trend output growth in the third quarter was a welcome development. Moreover, the upturn in real GDP appeared to reflect stronger final demand and not just a slower pace of inventory decumulation. While these developments were positive, participants noted that it was not clear how much of the recent firming in final demand reflected the effects of temporary fiscal programs to support the auto and housing sectors, and some participants expressed concerns about the ability of the economy to generate a self-sustaining recovery without government support. Nonetheless, participants expected the recovery to continue in subsequent quarters, although at a pace that would be rather slow relative to historical experience, particularly the robust recoveries that followed previous steep downturns. Such a modest pace of expansion would imply only slow improvement in the labor market next year, with unemployment remaining high. Indeed, participants noted that business contacts continued to report plans to be cautious in hiring and capital spending even as demand for their products increased. Nonetheless, economic growth was expected to strengthen during the next two years as housing construction continued to rise and financial conditions improved further, leading to more-substantial increases in resource utilization in product and labor markets. Most participants now viewed the risks to their growth forecasts as being roughly balanced rather than tilted to the downside, but uncertainty surrounding these forecasts was still viewed as quite elevated. Downside risks to growth included the continued weakness in the labor market and its implications for income growth and consumer confidence, as well as the potential for credit availability to remain relatively tight for consumers and some businesses. In this regard, some participants noted the difficulty that smaller, bank-dependent firms were having in securing financing. The CRE sector was also considered a downside risk to the forecast and a possible source of increased pressure on banks. On the other hand, consumer spending on items other than autos had been stronger than expected, which might be signaling more underlying momentum in the recovery and some chance that the step-up in spending would be sustained going forward. In addition, growth abroad had exceeded expectations for some time, potentially providing more support to U.S. exports and domestic growth than anticipated. Financial market developments over recent months were generally regarded as supportive of continued economic recovery, with equity prices considerably higher, private credit spreads substantially lower, and financial markets generally performing significantly better than earlier in the year. Participants noted, however, that bank credit remained tight. With rising levels of nonperforming loans expected to continue to be a source of stress, and with many regional and small banks vulnerable to the deteriorating performance of CRE loans, banks continued to tighten lending standards for C&I loans and consumer loans, although the net percentage of banks reporting further tightening in each category had fallen in recent surveys. Bank loans continued to contract sharply in all categories. Participants noted that the dichotomy between significant easing of conditions in capital markets and continuing tight conditions in the banking sector implied that financing conditions differed for large and small firms. Large firms with access to debt and equity markets for financing had relatively little difficulty in obtaining credit and in many cases also had high levels of retained earnings with which to fund their operations and investment. In contrast, smaller firms, which tend to be more dependent on commercial banks for financing, reportedly faced substantial constraints in their access to credit. Limited credit availability, along with weak aggregate demand, was viewed as likely to restrain hiring at small businesses, which are normally a source of employment growth in recoveries. The weakness in labor market conditions remained an important concern to meeting participants, with unemployment expected to remain elevated for some time. Although the pace of job losses was moderating, the unusually large fraction of those who were working part time for economic reasons and the unusually low level of the average workweek pointed to only a gradual decline in the unemployment rate as the economic recovery proceeded. In addition, business contacts reported that they would be cautious in their hiring and would continue to aggressively seek cost savings in the absence of revenue growth. Indeed, participants expected that businesses would be able to meet any increases in demand in the near term by raising their employees' hours and boosting productivity, thus delaying the need to add to their payrolls; this view was supported by aggregate data indicating rapid productivity growth in recent quarters. Moreover, the need to reallocate labor across sectors as the recovery proceeds, as well as losses of skills caused by high levels of long-term unemployment and permanent separations, could limit the pace of gains in employment. Participants discussed the possibility that this recovery could resemble the past two, which were characterized by a slow pace of hiring for a time even after aggregate demand picked up. The prospect for continued weakness in labor markets remained an important factor in the outlook for consumer spending. Although consumer spending had picked up more than expected in recent months, participants saw that increase as partly reflecting special factors such as the cash-for-clunkers program. Uncertain job prospects, slow income growth, and tight credit, as well as wealth levels that remained relatively low despite the recent rise in equity prices and stabilization in house prices, were seen as weighing on consumer confidence and the growth of consumer spending for some time to come. In such an environment, households' saving behavior was an important source of uncertainty in the outlook. Participants continued to believe that the most likely outcome was for the saving rate to remain near its average level over the past few quarters or to edge up gradually. However, they could not completely discount the possibility of a further substantial rise in the saving rate as households took further steps to repair their balance sheets. Participants noted that firms seemed to be reducing inventories at a slower pace than earlier in the year and apparently had made substantial progress in reducing stocks toward desired levels. With inventories lower, firms were beginning to raise production to meet at least a portion of increased demand, and this adjustment was expected to make an important contribution to economic recovery in the fourth quarter of the year and, to a lesser extent, in 2010 as well. Investment in E&S appeared to have stabilized in the third quarter, and recent data on new orders continued to point to a pickup next year. However, many participants expressed the view that cautious business sentiment, together with low industrial utilization rates, was likely to keep new capital spending subdued until firms became more confident about the durability of increases in demand. In the residential real estate sector, home sales and construction increased over recent months from very low levels; moreover, house prices appeared to be stabilizing and in some areas had reportedly moved higher. Generally, the outlook was for these trends to continue. However, some participants still viewed the improvements as quite tentative, pointing to potential sources of softness from the pending termination of the temporary tax credit for first-time homebuyers, the winding down of the Federal Reserve's agency MBS purchase program, and the downward pressure that anticipated further increases in foreclosures would put on house prices. In contrast to developments in the residential sector, CRE activity continued to fall markedly in most Districts as a result of deteriorating fundamentals, including declining occupancy and rental rates and very tight credit conditions. Stronger foreign economic activity, especially in Asia, as well as the partial reversal this year of the dollar's appreciation during the latter part of 2008, was providing support to U.S. exports. Participants noted that the recent fall in the foreign exchange value of the dollar had been orderly and appeared to reflect an unwinding of safe-haven demand in light of the recovery in financial market conditions this year, but that any tendency for dollar depreciation to intensify or to put significant upward pressure on inflation would bear close watching. Further improvements in foreign economies would likely buoy U.S. exports going forward, but as the recovery took hold in the United States, import growth would also strengthen. Participants continued to discuss the appropriate weights to place on resource slack, inflation expectations, and other factors in assessing the inflation outlook. In the near term, most participants anticipated that substantial slack in both labor and product markets would likely keep inflation subdued. Indeed, the considerable decelerations in wages and unit labor costs this year were cited as factors putting downward pressure on inflation. However, some participants noted that the recent rise in the prices of oil and other commodities, as well as increases in import prices stemming from the decline in the foreign exchange value of the dollar, could boost inflation pressures. Overall, many participants viewed the risks to their inflation outlooks over the next few quarters as being roughly balanced. Some saw the risks as tilted to the downside in the near term, reflecting the quite elevated level of economic slack and the possibility that inflation expectations could begin to decline in response to the low level of actual inflation. But others felt that risks were tilted to the upside over a longer horizon, because of the possibility that inflation expectations could rise as a result of the public's concerns about extraordinary monetary policy stimulus and large federal budget deficits. Moreover, these participants noted that banks might seek to reduce appreciably their excess reserves as the economy improves by purchasing securities or by easing credit standards and expanding their lending substantially. Such a development, if not offset by Federal Reserve actions, could give additional impetus to spending and, potentially, to actual and expected inflation. To keep inflation expectations anchored, all participants agreed that it was important for policy to be responsive to changes in the economic outlook and for the Federal Reserve to continue to clearly communicate its ability and intent to begin withdrawing monetary policy accommodation at the appropriate time and pace. Committee Policy ActionIn the members' discussion of monetary policy for the period ahead, they agreed that no substantive changes to the Committee's federal funds target range or large-scale asset purchase programs were warranted at this meeting. On balance, the economic outlook had changed little since the September meeting. The recovery appeared to be continuing and was expected to gradually strengthen over time. Still, most members projected that over the next couple of years, the unemployment rate would remain quite elevated and the level of inflation would remain below rates consistent over the longer run with the Federal Reserve's objectives. Based on this outlook, members decided to maintain the federal funds target range at 0 to 1/4 percent and to continue to state their expectation that economic conditions were likely to warrant exceptionally low rates for an extended period. Low levels of resource utilization, subdued inflation trends, and stable inflation expectations were among the important factors underlying their expectation for monetary policy, and members agreed that policy communications would be enhanced by citing these conditions in the policy statement. Members noted the possibility that some negative side effects might result from the maintenance of very low short-term interest rates for an extended period, including the possibility that such a policy stance could lead to excessive risk-taking in financial markets or an unanchoring of inflation expectations. While members currently saw the likelihood of such effects as relatively low, they would remain alert to these risks. All agreed that the path of short-term rates going forward would be dependent on the evolution of the economic outlook. With respect to the large-scale asset purchase programs, all members supported reiterating the Committee's intention to purchase $1.25 trillion of agency MBS by the end of the first quarter of 2010. The Committee also agreed to specify that its agency debt purchases would cumulate to about $175 billion by the end of the first quarter, $25 billion less than the previously announced maximum for these purchases. Owing to the limited availability of agency debt and concerns that larger purchases could impair market functioning, the Committee's transactions in these instruments for some time had been on a trajectory that would leave total purchases somewhat below the previously established maximum. Announcing that purchases would total about $175 billion was viewed as providing greater clarity to the public regarding the expected amount of purchases and would not reflect a decision to scale back the degree of policy accommodation. Members also decided to reiterate their intention to gradually slow the pace of the Committee's agency MBS and agency debt purchases to promote a smooth transition in markets as the announced purchases are completed. The Committee agreed that it would continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to purchase agency debt and agency MBS during the intermeeting period with the aim of providing support to private credit markets and economic activity. The timing and pace of these purchases should depend on conditions in the markets for such securities and on a broader assessment of private credit market conditions. The Desk is expected to execute purchases of about $175 billion in housing-related agency debt and about $1.25 trillion of agency MBS by the end of the first quarter of 2010. The Desk is expected to gradually slow the pace of these purchases as they near completion. The Committee anticipates that outright purchases of securities will cause the size of the Federal Reserve's balance sheet to expand significantly in coming months. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability." The vote encompassed approval of the statement below to be released at 2:15 p.m.: "Information received since the Federal Open Market Committee met in September suggests that economic activity has continued to pick up. Conditions in financial markets were roughly unchanged, on balance, over the intermeeting period. Activity in the housing sector has increased over recent months. Household spending appears to be expanding but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability. With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time. In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. The amount of agency debt purchases, while somewhat less than the previously announced maximum of $200 billion, is consistent with the recent path of purchases and reflects the limited availability of agency debt. In order to promote a smooth transition in markets, the Committee will gradually slow the pace of its purchases of both agency debt and agency mortgage-backed securities and anticipates that these transactions will be executed by the end of the first quarter of 2010. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted." Voting for this action: Messrs. Bernanke and Dudley, Ms. Duke, Messrs. Evans, Kohn, Lacker, Lockhart, Tarullo, and Warsh, and Ms. Yellen. Voting against this action: None. It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, December 15-16, 2009. The meeting adjourned at 12:40 p.m. on November 4, 2009. Notation VoteBy notation vote completed on October 13, 2009, the Committee unanimously approved the minutes of the FOMC meeting held on September 22-23, 2009. _____________________________Brian F. MadiganSecretary 1. Attended the portion of the meeting relating to financial developments, open market operations, and System facilities. Return to text Return to top

2009-11-04

Statement

Information received since the Federal Open Market Committee met in September suggests that economic activity has continued to pick up. Conditions in financial markets were roughly unchanged, on balance, over the intermeeting period. Activity in the housing sector has increased over recent months. Household spending appears to be expanding but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability. With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time. In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. The amount of agency debt purchases, while somewhat less than the previously announced maximum of $200 billion, is consistent with the recent path of purchases and reflects the limited availability of agency debt. In order to promote a smooth transition in markets, the Committee will gradually slow the pace of its purchases of both agency debt and agency mortgage-backed securities and anticipates that these transactions will be executed by the end of the first quarter of 2010. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted. Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

2009-09-22

Statement

Information received since the Federal Open Market Committee met in August suggests that economic activity has picked up following its severe downturn.  Conditions in financial markets have improved further, and activity in the housing sector has increased.  Household spending seems to be stabilizing, but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit.  Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales.  Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability. With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time. In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability.  The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.  To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt.  The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010.  As previously announced, the Federal Reserve’s purchases of $300 billion of Treasury securities will be completed by the end of October 2009.  The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets.  The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted. Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

2009-10-14

Minute

A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held in the offices of the Board of Governors in Washington, D.C., on Tuesday, September 22, 2009, at 2:00 p.m. and continued on Wednesday, September 23, 2009, at 9:00 a.m. PRESENT: Mr. Bernanke, ChairmanMr. Dudley, Vice ChairmanMs. DukeMr. EvansMr. KohnMr. LackerMr. LockhartMr. Tarullo Mr. WarshMs. Yellen Mr. Bullard, Ms. Cumming, Mr. Hoenig, Ms. Pianalto, and Mr. Rosengren, Alternate Members of the Federal Open Market Committee Messrs. Fisher and Plosser, Presidents of the Federal Reserve Banks of Dallas and Philadelphia, respectively Mr. Lyon, First Vice President, Federal Reserve Bank of Minneapolis Mr. Madigan, Secretary and EconomistMr. Luecke, Assistant SecretaryMr. Skidmore, Assistant SecretaryMs. Smith, Assistant SecretaryMr. Alvarez, General CounselMr. Ashton, Assistant General CounselMr. Sheets, Economist Mr. Stockton, Economist Messrs. Altig, Clouse, Connors, Kamin, Slifman, Sullivan, Tracy, Weinberg, and Wilcox, Associate Economists Mr. Sack, Manager, System Open Market Account Ms. Johnson, Secretary of the Board, Office of the Secretary, Board of Governors Mr. Struckmeyer, Deputy Staff Director, Office of the Staff Director for Management, Board of Governors Ms. Barger and Mr. English, Deputy Directors, Divisions of Banking Supervision and Regulation and Monetary Affairs, respectively, Board of Governors Ms. Robertson, Assistant to the Board, Office of Board Members, Board of Governors Ms. Edwards, Messrs. Reifschneider and Wascher, Senior Associate Directors, Divisions of Monetary Affairs, Research and Statistics, and Research and Statistics, respectively, Board of Governors Mr. Oliner, Senior Adviser, Division of Research and Statistics, Board of Governors Mr. Small, Project Manager, Division of Monetary Affairs, Board of Governors Ms. Low, Open Market Secretariat Specialist, Division of Monetary Affairs, Board of Governors Mr. Williams, Records Management Analyst, Division of Monetary Affairs, Board of Governors Mr. Connolly,1 First Vice President, Federal Reserve Bank of Boston Messrs. Fuhrer and Rosenblum, Executive Vice Presidents, Federal Reserve Banks of Boston and Dallas, respectively Mr. Hakkio, Ms. Mester, Messrs. Rasche, Rudebusch, and Schweitzer, Senior Vice Presidents, Federal Reserve Banks of Kansas City, Philadelphia, St. Louis, San Francisco, and Cleveland, respectively Mr. Weber, Senior Research Officer, Federal Reserve Bank of Minneapolis Mr. McCarthy and Ms. O'Connor, Assistant Vice Presidents, Federal Reserve Bank of New York Mr. Chatterjee, Senior Economic Advisor, Federal Reserve Bank of Philadelphia Developments in Financial Markets and the Federal Reserve's Balance SheetThe Manager of the System Open Market Account reported on recent developments in domestic and foreign financial markets. The Manager also reported on System open market operations in Treasury securities, agency debt, and agency mortgage-backed securities (MBS) since the Committee's August 11-12 meeting. By unanimous vote, the Committee ratified those transactions. There were no open market operations in foreign currencies for the System's account during the intermeeting period. Since the Committee met in August, the Federal Reserve's total assets had risen about $125 billion, on balance, to approximately $2.1 trillion, as the System's purchases of securities exceeded a further decline in usage of the System's credit and liquidity facilities. The staff briefed the Committee on the current status of the asset purchase programs. Participants noted that the primary influence of the programs is likely through the cumulative effect that they generate on the publicly available stocks of securities. However, they also observed that the rate of new purchases could have an effect on asset prices, especially of MBS. Given this possibility, participants remarked that a gradual reduction in the pace at which the Federal Reserve buys agency debt and agency MBS could help promote a smooth transition in markets as the announced asset purchases are completed. Participants observed that such a strategy would be similar to the approach adopted in August for the purchases of Treasury securities and generally viewed it as a useful step to mitigate the risk of a sharp change in yields as purchases end. Participants expressed a range of views about the rate at which asset purchases should be slowed. Some suggested tapering quickly and completing the purchases by year-end, while a few preferred slowing the rate of purchases over a longer period in order to maintain flexibility regarding the pace and the cumulative amount purchased and thus potentially better calibrate the programs to evolving economic and financial market conditions. Most participants supported extending purchases of agency debt and agency MBS through the first quarter of 2010. The staff also briefed the Committee on the likely implications of very high reserve balances for bank balance sheet management and for the economy. The staff's assessment, based in part on consultations with market participants, was that many banks were currently comfortable holding high levels of reserves as a means of managing liquidity risks, and these balances or further increases along the lines implied by the announced programs were not likely to crowd out other lending through pressures on capital positions. As the economy improves, however, banks could seek to lower their levels of reserve balances by purchasing securities, thereby putting downward pressure on market interest rates, or by easing their credit standards and terms in order to expand lending. Such effects, if significant, would provide further impetus to economic growth. The staff analysis indicated that these effects would likely emerge only gradually and that their magnitude could be quite limited. However, some participants thought that declining demand for reserves might already be putting downward pressure on yields. Participants expressed a range of views about the likely stimulative effect of a further expansion of reserve balances on economic activity, as well as the potential impact of elevated reserves on inflation expectations. Some meeting participants noted that the announced decrease in the balance in the Treasury's Supplementary Financing Account (SFA) would increase reserves in the banking system unless it were offset by Federal Reserve actions or by a further reduction in borrowing from the Federal Reserve's various credit and liquidity facilities, and that these increases could be expansionary. Others noted that the decrease in the SFA could well be temporary and, in any event, that the macroeconomic effects of the increase in reserves would probably be limited in the current environment. The staff presented an update on the continuing development of several tools that could help support a smooth withdrawal of policy accommodation at the appropriate time. These measures included executing reverse repurchase agreements on a large scale, potentially with counterparties other than the primary dealers; implementing a term deposit facility, available to depository institutions, to reduce the supply of reserve balances; and taking steps to tighten the link between the interest rate paid on reserve balances held at the Federal Reserve Banks and the federal funds rate. Participants expressed confidence that these tools, along with the payment of interest on reserves and possible sales of assets from the System's portfolio, would allow them to remove policy accommodation at the appropriate time and pace. Completing development of these tools would remain a top priority of the Federal Reserve. The staff presented proposed schedules for operations under the Term Auction Facility (TAF) and Term Securities Lending Facility (TSLF) through January 2010. As conditions in short-term funding markets had continued to improve, usage of these facilities had diminished. The proposed schedules were consistent with not only the Federal Reserve's previously announced intention to gradually scale back these facilities in response to continued improvements in financial market conditions, but also with a desire to assure market participants that the Federal Reserve will provide sufficient liquidity over year-end. There was general agreement that the Federal Reserve should assess over the next several months whether to maintain a TAF on a permanent basis. Secretary's note: On September 24, 2009, the Federal Reserve announced schedules for operations under the TAF and the TSLF through January 2010 and indicated that it would seek public comment on a proposal for a permanent TAF. Staff Review of the Economic SituationThe information reviewed at the September 22-23 meeting suggested that overall economic activity was beginning to pick up. Factory output, particularly motor vehicle production, rose in July and August. Consumer spending on motor vehicles during that period was boosted by government rebates and greater dealer incentives, and household spending outside of motor vehicles appeared to rise in August after having been roughly flat from May through July. Although employment continued to contract in August, the pace of job losses slowed noticeably from that of earlier in the year. Investment in equipment and software (E&S) also seemed to be stabilizing. Sales and construction of single-family homes during July and August, while still at low levels, were significantly above the readings at the beginning of the year. The sharp cuts in production this year reduced inventory stocks significantly, though they remained elevated relative to the recent level of sales. Core consumer price inflation continued to be subdued in July and August, but higher gasoline prices raised overall consumer price inflation in August. Firms continued to reduce payrolls, but job losses abated further in August, with the decline in private payroll employment the smallest since that of August 2008. Although employment losses continued to be widespread, the rate of decline diminished in most industries. The length of the average workweek for production and nonsupervisory workers remained steady, albeit at a low level, and the rate of decline in aggregate hours for this group over July and August was the smallest of the past year. In the household survey, although the unemployment rate rose in August to 9.7 percent, the rise in the unemployment rate slowed, on net, in recent months from its pace earlier in the year. The labor force participation rate in August remained at the low level that had prevailed through much of the year. Continuing claims for unemployment insurance through regular state programs fell slightly, on balance, from its earlier peak, but the total including extended and emergency benefits stayed near its recent high level. Initial claims for unemployment insurance fluctuated within a narrow range that was consistent with further declines in employment. With labor markets still weak, the year-over-year increase in average hourly earnings of production and nonsupervisory workers slowed further in August, even with the higher federal minimum wage that went into effect at the end of July. Industrial production rose in July and August, led by a rebound in motor vehicle production from the extraordinarily low assembly rates in the first half of the year. Manufacturing production outside of motor vehicles increased solidly, likely reflecting stronger demand for materials from the motor vehicle sector and a slower pace of inventory liquidation elsewhere. Business survey indicators suggested further gains in factory output over the near term. Nevertheless, the factory utilization rate in August was only modestly above its recent historical low. Real personal consumption expenditures increased modestly in July, led by a strong advance in motor vehicle purchases, which were boosted appreciably by the government's "cash-for-clunkers" program. This program contributed to a further surge in motor vehicle sales in August to their highest level since the first half of 2008. After declining in July, sales at retailers, excluding those at motor vehicle dealers, building materials stores, and gasoline stations, rose significantly in August, suggesting an increase in real consumer expenditures on non-motor-vehicle goods for the month. Even so, many determinants of spending continued to be tepid. In particular, the weak labor market continued to restrain growth in household income, and the prior declines in household net worth probably continued to weigh on spending. However, an increase in household net worth since March, a rise in nominal labor compensation in July, and increases in various measures of consumer sentiment indicated some improvement in the outlook for consumer spending. Data from the housing sector indicated that a gradual recovery in activity was under way. Although single-family housing starts fell modestly in August, this decrease followed five consecutive monthly increases, and the number of starts in August was well above the record low reached in the first quarter of the year. In contrast, in the much smaller multifamily sector, where credit conditions were still particularly tight and vacancy rates remained high, starts continued to be down, on net, in 2009 after a significant fall in the second half of 2008. The sales data for July indicated further increases in the demand for both new and existing single-family homes. Even though new home sales remained modest, they had been sufficient, given the slow pace of construction, to pare the overhang of unsold new single-family houses: In July, the level of inventories of such homes was about one-half of its peak in the summer of 2006, and the months' supply had fallen considerably from its record high in January. Sales of existing homes in July were at their fastest pace since mid-2007, and pending home sales agreements suggested that resale activity would rise further in following months. Although sales of distressed properties remained elevated, the rise in total sales of existing homes over the summer appeared to have been driven by an increase in transactions involving nondistressed properties. The apparent modest strengthening of housing demand was likely due, in part, to improvements in housing affordability stemming from low interest rates for conforming mortgages, a lower level of house prices, and possibly the first-time homebuyer tax credit. In addition, demand may have been buoyed by a sense that house prices were beginning to stabilize. Through the end of the second quarter, many house price indexes had smaller year-over-year declines than they had shown earlier this year, and some indexes recorded positive changes for the second quarter. Real spending on E&S appeared to be stabilizing after falling sharply for more than a year. Business purchases of transportation equipment seemed to be expanding solidly in the third quarter. Nominal shipments and orders for high-tech equipment in July were significantly above their second-quarter averages; moreover, a few major producers of high-tech equipment reported some signs of improvement in demand. Business investment in equipment other than high tech and transportation showed tentative signs of stabilization. Some forward-looking indicators of investment in E&S improved, suggesting that conditions had become less adverse than earlier in the year. Monthly surveys of business conditions and sentiment recently recovered to levels consistent with a modest rise in business spending, and corporate bond spreads over Treasury securities narrowed further. In contrast, conditions in the nonresidential construction sector generally remained quite poor, and measures of construction spending excluding energy-related projects stayed on a downward trajectory through July. Vacancy rates continued to rise, property prices fell further, and financing for nonresidential construction projects remained very tight. The nominal book value of businesses inventories continued to fall in July, which contributed to further declines in inventory-to-sales ratios; however, those ratios stayed elevated. After narrowing to a 10-year low in May, the U.S. international trade deficit widened in June and July, as strong increases in exports were more than offset by sizable rises in imports. The July trade data provided additional evidence that the levels of both exports and imports probably reached their trough in the second quarter. About one-half of the increase in exports of goods and services in July was in exports of automotive products; the other gains were widespread across other major categories of exports. As with exports, the largest increase in imports of goods and services in July was in automotive products, reflecting some recovery in North American motor vehicle production. Imports of consumer goods, capital goods, and industrial supplies also rose markedly. Imports of oil increased more moderately, with the rise wholly reflecting higher prices. Real gross domestic product (GDP) in the advanced foreign economies contracted more moderately in the second quarter than in the first quarter, with growth resuming in several countries. In Japan, a trade-related rebound in industrial production led to an increase in overall output. Government incentives for motor vehicle purchases contributed to a modest expansion of the German and French economies, but the euro-area economy as a whole contracted slightly as inventory drawdowns weighed on activity. Output also fell in Canada and the United Kingdom. Purchasing managers indexes (PMIs) rose further in the major economies during the intermeeting period, and reached levels consistent with stabilization or moderate expansion of output in the third quarter. Indicators of consumer sentiment continued to increase, but remained well below pre-recession levels, in part because of concerns about rising unemployment. In most emerging market economies, particularly in Asia, economic activity rebounded in the second quarter; however, output declined again in Mexico. Indicators of activity in the third quarter pointed to a continued expansion of output in most emerging market countries, and PMIs moved into the expansionary range in many of them. International trade in emerging market economies picked up, supported by Chinese demand, while demand from advanced economies still appeared weak. In the United States, core consumer price inflation remained subdued in July and August, as price increases in housing services moderated and durable goods prices declined. Overall consumer price inflation increased in August, boosted by a sharp upturn in energy prices, particularly those of gasoline. The latest available survey data indicated that gasoline prices edged up further in the first half of September. Consumer food prices were little changed in August. According to the preliminary September release of the Reuters/University of Michigan Surveys of Consumers, median year-ahead inflation expectations decreased modestly in the first half of September, but remained somewhat above the low levels posted at the beginning of the year. Longer-term inflation expectations from this survey stayed in the narrow range that has prevailed over recent years. The producer price index for core intermediate materials rose in August, its third consecutive monthly increase; over those three months, the index retraced about one-third of the decline of the previous eight months. All measures of nominal hourly compensation and wages suggested that labor costs had decelerated markedly this year amid the considerable weakness in labor markets. Staff Review of the Financial SituationThe decisions by the Federal Open Market Committee (FOMC) at the August meeting to leave the target range for the federal funds rate unchanged and to maintain the maximum sizes of its large-scale asset purchase programs, along with the accompanying statement, were broadly in line with market expectations. The announcement in the statement of the decision to slow the pace of Treasury securities purchases so that the full amount of $300 billion would be completed by the end of October reduced uncertainty about the timing of the end of this program and the ultimate amount of purchases. After the release of the statement, the expected path for the federal funds rate implied by money market futures prices declined modestly. Subsequently, the expected policy path shifted down further, on net, as investors apparently interpreted weak labor market conditions and generally quiescent inflation as consistent with an outlook that would lead the FOMC to maintain low policy rates over the medium term. In addition, investors' uncertainty about the future policy rate path appeared to diminish, which may have also contributed to the lowering of the path implied by futures prices by reducing term premiums. Yields on nominal Treasury securities also decreased since the Committee met in August. A decline in implied volatility on longer-term Treasury yields suggested that some of the drop in yields was due to reduced risk premiums. Inflation compensation based on five-year Treasury inflation-protected securities (TIPS) increased a little, on balance, over the intermeeting period, while five-year inflation compensation five years ahead declined modestly; the decrease in forward inflation compensation partially reversed increases in prior intermeeting periods. Liquidity in the TIPS market reportedly continued to be poor, complicating inferences about investors' expectations of future inflation. Conditions in short-term funding markets showed modest further improvement over the intermeeting period. Spreads between London interbank offered rates (Libor) and overnight index swaps (OIS) at the one- and three-month maturities returned to near the levels that prevailed before the onset of the financial crisis in August 2007. Longer-term Libor-OIS spreads also narrowed, but they remained high by historical standards. Reports continued to suggest that lending institutions were unusually selective about their counterparties in funding markets. Spreads on A2/P2-rated commercial paper and AA-rated asset-backed commercial paper were little changed, on net, remaining at the low end of their ranges over the past two years. Indicators of Treasury market functioning showed no material change, and functioning continued to be somewhat impaired. Bid-asked spreads held roughly steady, and trading volumes remained low. The on-the-run liquidity premium for the 10-year Treasury note was little changed at an elevated level, although it was well below its peak last fall; the premiums on two- and five-year Treasury securities stayed low. Amid lower interest rates as well as further indications that the contraction in economic activity may have ended, broad stock price indexes rose, on net, over the intermeeting period. The spread between an estimate of the expected real equity return over the next 10 years for S&P 500 firms and an estimate of the real 10-year Treasury yield--a rough gauge of the equity risk premium--remained high by historical standards. After having dropped significantly in prior months, option-implied volatility on the S&P 500 index declined modestly, on balance, over the intermeeting period, but was still at a level comparable with that of previous recessions. Yields on corporate bonds fell a bit more than those on Treasury securities of similar duration. Indicators suggested that liquidity in the secondary market for corporate bonds increased a bit further. Conditions in the secondary market for leveraged syndicated loans continued to improve slowly, as secondary-market prices rose slightly and bid-asked spreads narrowed. Changes in investor sentiment toward claims on financial firms were mixed over the intermeeting period. Equity prices for larger banks increased, but stock prices for regional and smaller banks were little changed. Market participants reportedly took note of the increased number of failures at regional and smaller banks and remained concerned about the credit quality of such banks' loan portfolios and their ability to raise capital. Credit default swap spreads for banking institutions changed little, on net, over the intermeeting period. A number of financial institutions issued debt that was not guaranteed by the Federal Deposit Insurance Corporation. The level of debt of the private domestic nonfinancial sector declined again in the second quarter, as both household and nonfinancial business debt fell. Consumer credit posted its sixth consecutive monthly decline in July; both revolving and nonrevolving credit showed sizable drops. While issuance of consumer credit asset-backed securities decreased in August, a large volume of securities eligible for the Term Asset-Backed Securities Loan Facility was issued in early September. Gross bond issuance by nonfinancial corporations rose in August following a lull in July; the rebound was particularly robust for speculative-grade firms. However, commercial paper outstanding was unchanged and bank loans fell again; as a result, borrowing by the nonfinancial business sector declined, on net, again in August. In contrast, the federal government continued to issue debt at a rapid pace, and gross issuance of state and local government debt was robust, supported in part by issuance of Build America Bonds authorized under the fiscal stimulus program. Commercial bank credit contracted further in August; all major loan categories declined. Commercial and industrial (C&I) lending again decreased steeply amid reported broad-based paydowns of outstanding loans. At the same time, the latest Survey of Terms of Business Lending showed that C&I loan spreads over comparable-maturity market instruments rose noticeably in recent months. The contraction of commercial real estate loans held by banks also intensified in August. Even though originations of residential mortgages apparently increased during August, banks sold an unusually large volume of loans to the government-sponsored enterprises; consequently, banks' balance sheet holdings of residential mortgages decreased markedly. After declining in July, M2 contracted more quickly in August. The reduced demand for M2 assets likely reflected low interest rates on retail deposits and money market mutual fund shares, as well as a continued reallocation of wealth toward riskier assets. Small time deposits and retail money market mutual funds fell more sharply in August than earlier in the year. Liquid deposits increased in August, but at a slower rate than in July. Currency expanded less rapidly in July and August than in the first half of the year, as demand from abroad evidently was restrained. Global financial markets showed some further signs of stabilization over the intermeeting period. Stock indexes in Europe rose solidly, apparently reflecting an improved economic outlook, but the Japanese stock market declined modestly. In emerging markets, credit default swap spreads on sovereign debt declined slightly, and equity prices in most countries rose moderately; however, stock prices fell notably in China, partly driven by reports that authorities were taking actions to moderate loan growth. Despite fairly positive economic indicators, sovereign yields fell in major industrial economies, reportedly in part because of the reiteration by major central banks of their intention to keep policy interest rates low. On a trade-weighted basis, the dollar depreciated against major foreign currencies, notably against the euro and Japanese yen; it was little changed, on average, against the currencies of the other major trading partners of the United States. The European Central Bank, the Bank of England, the Bank of Canada, and the Bank of Japan kept their respective policy rates constant over the intermeeting period. On the first day of the FOMC meeting, the Bank of Canada announced the expiration of two temporary liquidity facilities at the end of October 2009. Staff Economic OutlookIn the forecast prepared for the September FOMC meeting, the staff raised its projection for real GDP growth over the second half of 2009 and over 2010. The information received during the intermeeting period appeared to indicate a more noticeable upturn than anticipated at the time of the August meeting: Sales and starts of single-family homes provided evidence of some firming in housing activity, capital spending indicators pointed to an earlier-than-anticipated trough for investment in E&S, and some data suggested a modest recovery in consumer spending. These tentative signs of a recovery of economic activity were supported by other factors, including recent rises in house and equity prices that would support household net worth, declines in interest rates on corporate bonds and fixed-rate mortgages, and a stronger outlook for activity in foreign economies. The staff expected that these positive factors would lead to a modest increase in final sales in the second half of 2009, despite continued weakness in commercial construction and some further deterioration in labor markets. As a result of the expected increase in final sales and an anticipated reduction in inventory liquidation, the staff projected that real GDP would increase in the second half of 2009 at a rate somewhat above the growth rate of potential output. For 2010, the staff forecast that output growth would continue to strengthen, supported by an ongoing improvement in financial conditions, a fading of the drag from earlier declines in income and wealth, accommodative monetary and fiscal policy, and recovery in the housing sector. These factors also contributed to an expected further increase in real GDP growth in 2011, despite an anticipated decline in the impetus from fiscal policy. Even though the upward revision to the projection for output was expected to generate larger gains in employment than previously forecast, the staff still projected only a slow improvement in labor markets, with the unemployment rate moving down to about 9 1/4 percent by the end of 2010 and then falling to about 8 percent by the end of 2011. The staff forecast for inflation was little changed from that at the August meeting. The recent data on consumer price inflation were a little above staff expectations, but still indicated a slower increase in core prices compared with those of earlier in the year. Survey measures of inflation expectations displayed no significant change. Nonetheless, with the significant under-utilization of resources expected to persist through 2011, the staff forecast core inflation to slow somewhat further over the next two years from the pace of the first half of 2009. Because of recent increases in energy prices, overall consumer price inflation was projected to be somewhat above core inflation in the second half of 2009 and 2010, but it was expected to be near the core rate in 2011. Participants' Views on Current Conditions and the Economic OutlookIn their discussion of the economic situation and outlook, meeting participants agreed that the incoming data and information received from business contacts suggested that economic activity had picked up following its severe downturn; most thought an economic recovery was under way. Many participants noted that since August, they had revised up their projections for the second half of 2009 and for subsequent years. A number of factors were expected to support growth over the next few quarters: Activity in the housing sector was evidently rising, and house prices had apparently stabilized or even increased; consumer spending seemed to be in the process of leveling out; reports from business contacts and regional surveys were consistent with firms making progress in bringing inventories into better alignment with sales and with production stabilizing or beginning to rise in many sectors; the outlook for growth abroad had also improved, auguring well for U.S. exports; and financial market conditions had continued to improve over the past several months. Despite these positive factors, many participants noted that the economic recovery was likely to be quite restrained. Credit from banks remained difficult to obtain and costly for many borrowers; these conditions were expected to improve only gradually. In light of recent experience, consumers were likely to be cautious in spending, and business contacts indicated that their firms would also be cautious in hiring and investing even as demand for their products picked up. Some of the recent gains in activity probably reflected government policy support, and participants expressed considerable uncertainty about the likely strength of the upturn once those supports were withdrawn or their effects waned. Overall, the economy was projected to expand over the remainder of 2009 and during 2010, but at a pace that was unlikely to reduce the unemployment rate appreciably. Subsequently, as the housing market picked up further and financial conditions improved, economic growth was expected to strengthen, leading to more-substantial increases in resource utilization over time. Nonetheless, most participants anticipated that slack in both labor and product markets would be substantial over the next few years, leading to subdued and potentially declining wage and price inflation. Some participants were skeptical of the usefulness of measures of resource utilization in gauging inflation pressures, partly because of the difficulty of measuring slack, especially in real time. Also, those participants noted that the degree to which slack reduces inflation depends on the stability of longer-term inflation expectations, which in turn depends on expectations for monetary policy. In any case, all participants recognized that inflation expectations are a key determinant of inflation, and that various measures of inflation expectations, although imperfect, needed to be carefully monitored in the current environment. Participants discussed the extent to which the size of the Federal Reserve's balance sheet would affect inflation expectations going forward. To keep inflation expectations well anchored, all agreed on the importance of the Federal Reserve continuing to communicate that it has the tools and willingness to begin withdrawing monetary policy accommodation at the appropriate time and pace to prevent any persistent increase in inflation. Overall, many participants viewed the risks to their inflation outlook over the next few quarters as being roughly balanced. A few continued to see some risk of substantial further disinflation, but that risk had eased somewhat further over the intermeeting period. Over a longer horizon, a few felt the risks were tilted to the upside. Developments in financial markets were again regarded as broadly positive; participants saw the cumulative improvement in market functioning and pricing since the spring as substantial. Over the intermeeting period, the strengthening in the economic outlook led to an increase in investors' appetite for riskier assets. Markets for corporate debt continued to improve, private credit spreads narrowed further, and equity prices rose. Given the improved economic prospects, the decline in longer-term Treasury yields and the apparent marking down of the implied path for the policy interest rate were seen as somewhat puzzling but supportive of recovery. Some participants saw the decline in yields on Treasury securities and other instruments as an indication that the expansion of excess reserve balances was putting downward pressure on market rates; some others viewed the configuration of rate movements as consistent with reduced concerns about inflation and with lower term premiums in a more settled economic environment. In any event, the ongoing improvement in broader financial and economic conditions seemed to some participants to reflect the onset of a positive feedback loop in which better financial conditions contribute to stronger growth in output and employment, which in turn bolsters expected returns and strengthens financial firms, leading to a further easing in financial conditions. Others noted, however, that many financial markets and institutions were still strained and that downside financial risks remained. In particular, because the improvement in financial markets was due, in part, to support from various government programs, market functioning might deteriorate as those programs wind down. Moreover, credit remained quite tight for many businesses and households dependent on banks, and many regional and small banks were vulnerable to the deteriorating performance of commercial real estate loans. Participants noted that all categories of bank lending continued to decline. Participants emphasized that labor market conditions remained weak. Although recent data indicated that the pace at which employment was declining had slowed, job losses remained sizable and the unemployment rate was high. The unusually large fraction of those who were working part time for economic reasons, the unusually low level of the average workweek, and indications from business contacts that firms would be slow to hire additional staff as sales and production turn up all pointed to a period of modest job gains, and thus only a slow decline in the unemployment rate as the economic recovery proceeds. Significant cost cutting by firms was thought to have led to a sizable increase in productivity growth in the first half of the year; sustained outsized gains in productivity could further damp hiring. Finally, high levels of long-term unemployment and permanent separations could lead to losses of skills and greater needs for labor reallocation that could slow employment growth. Consumer spending had picked up more than expected over the intermeeting period, but participants saw that increase as partly reflecting special factors like the cash-for-clunkers program. Recent increases in house prices and equity prices were positives, but participants generally expected no more than moderate growth in consumer spending over the near term. Households still faced considerable headwinds, including tight credit, high levels of debt, uncertain job prospects, and wealth levels that remained relatively low despite the recent rise in equity prices and stabilization in house prices. In that environment, households' saving behavior remained an important source of uncertainty in the outlook. The household saving rate had risen considerably in recent quarters, and the most likely outcome was for the saving rate to remain near its higher level; however, some participants noted that there was some chance that the sharp drop in household net worth over the past few years, reduced access to credit, and high household debt burdens could lead households to save a substantially larger fraction of their incomes going forward. Firms appeared to be reducing inventories and fixed investment at a slower pace than earlier in the year and had made substantial progress in reducing stocks toward desired levels. With inventories low, firms were beginning to raise production to meet at least a portion of new demand; this adjustment was likely to make an important contribution to economic recovery in the second half of this year. Recent data on new orders and shipments pointed to an earlier bottoming out in equipment and investment spending than previously anticipated. Some participants reported that while business contacts had expressed relief that the most severe economic outcomes had been avoided, they remained cautious about the recovery. This caution, together with low utilization rates and substantial excess capacity, could hold back the rate of increase of new capital spending. In the residential real estate sector, home sales and construction had increased from very low levels, and house prices appeared to be stabilizing. Participants welcomed the cumulating evidence that the housing sector was beginning to recover, and many participants had marked up their forecasts for housing activity. However, some viewed the improvement as quite tentative, pointing to the pending termination of the temporary tax credit for first-time homebuyers and the winding down of the Federal Reserve's agency MBS purchase program as potential risks to the outlook for the sector. Also, some participants questioned whether the recent stabilization in house prices would be sustained as likely further increases in foreclosures would probably put downward pressure on prices. Still, a better outlook for house prices was an important input to the improved economic outlook; not only would household wealth benefit from a turnaround in such prices, but the exposure of lenders to real estate losses would be diminished. In contrast to developments in the residential sector, commercial real estate activity continued to fall markedly in most districts, reflecting deteriorating fundamentals, including declining occupancy and rental rates and very tight credit conditions. Participants marked up their outlook for foreign economies, mainly reflecting better-than-expected incoming data from a range of countries. The pickup in foreign economic activity, especially in Asia, had buoyed U.S. export growth, and several participants noted that higher growth abroad would support growth in U.S. exports going forward. Committee Policy ActionIn their discussion of monetary policy for the period ahead, Committee members agreed that no significant changes to its policy target rate or large-scale asset purchase programs were warranted at this meeting. Although the economic outlook had improved further in recent weeks and the risks to the forecast had become more balanced, the level of economic activity was likely to be quite weak and resource utilization low. With substantial resource slack likely to persist and longer-term inflation expectations stable, the Committee anticipated that inflation would remain subdued for some time. Under these circumstances, the Committee judged that the costs of growth turning out to be weaker than anticipated could be relatively high. Accordingly, the Committee agreed that it was appropriate to maintain its target range for the federal funds rate at 0 to 1/4 percent and to reiterate its view that economic conditions were likely to warrant an exceptionally low level of the federal funds rate for an extended period. With respect to the large-scale asset purchase programs, some members thought that an increase in the maximum amount of the Committee's purchases of agency MBS could help to reduce economic slack more quickly than in the baseline outlook. Another member believed that the recent improvement in the economic outlook could warrant a reduction in the Committee's maximum purchases. However, all members were able to support an indication by the Committee of its intention at this time to purchase the full $1.25 trillion of agency MBS that it had previously established as the maximum for this program. With respect to agency debt, the Committee agreed to reiterate its intention to purchase up to $200 billion of these securities. To promote a smooth transition in markets as these programs are concluded, members decided to gradually slow the pace of both its agency MBS and agency debt purchases and to extend their completion through the end of the first quarter of 2010. The Committee agreed that it would continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. Members discussed the importance of maintaining flexibility to expand the asset purchase programs should the economic outlook deteriorate or to scale back the programs should economic and financial conditions improve more than anticipated. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to purchase agency debt, agency MBS, and longer-term Treasury securities during the intermeeting period with the aim of providing support to private credit markets and economic activity. The timing and pace of these purchases should depend on conditions in the markets for such securities and on a broader assessment of private credit market conditions. The Desk is expected to complete purchases of about $300 billion of longer-term Treasury securities by the end of October. It is also expected to execute purchases of up to $200 billion in housing-related agency debt and about $1.25 trillion of agency MBS by the end of the first quarter of 2010. The Desk is expected to gradually slow the pace of these purchases as they near completion. The Committee anticipates that outright purchases of securities will cause the size of the Federal Reserve's balance sheet to expand significantly in coming months. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability." The vote encompassed approval of the statement below to be released at 2:15 p.m.: "Information received since the Federal Open Market Committee met in August suggests that economic activity has picked up following its severe downturn. Conditions in financial markets have improved further, and activity in the housing sector has increased. Household spending seems to be stabilizing, but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability. With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time. In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt. The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010. As previously announced, the Federal Reserve's purchases of $300 billion of Treasury securities will be completed by the end of October 2009. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted." Voting for this action: Messrs. Bernanke and Dudley, Ms. Duke, Messrs. Evans, Kohn, Lacker, Lockhart, Tarullo, and Warsh, and Ms. Yellen. Voting against this action: None. It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, November 3-4, 2009. The meeting adjourned at 12:35 p.m. on September 23, 2009. Notation VotesBy notation vote completed on August 28, 2009, the Committee unanimously approved the designation of Matthew M. Luecke as the Committee's Chief Freedom of Information Act Officer, with authority to subdelegate duties as appropriate. By notation vote completed on September 1, 2009, the Committee unanimously approved the minutes of the FOMC meeting held on August 11-12, 2009. _____________________________Brian F. MadiganSecretary 1. Attended Tuesday's session only. Return to text Return to top

2009-09-02

Minute

A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held in the offices of the Board of Governors in Washington, D.C., on Tuesday, August 11, 2009, at 2:00 p.m. and continued on Wednesday, August 12, 2009, at 9:00 a.m. PRESENT:Mr. Bernanke, ChairmanMr. Dudley, Vice ChairmanMs. DukeMr. EvansMr. KohnMr. LackerMr. LockhartMr. Tarullo Mr. WarshMs. Yellen Mr. Bullard, Ms. Cumming, Mr. Hoenig, Ms. Pianalto, and Mr. Rosengren, Alternate Members of the Federal Open Market Committee Messrs. Fisher, Plosser, and Stern, Presidents of the Federal Reserve Banks of Dallas, Philadelphia, and Minneapolis, respectively Mr. Madigan, Secretary and EconomistMs. Danker, Deputy SecretaryMr. Luecke, Assistant SecretaryMr. Skidmore, Assistant SecretaryMs. Smith, Assistant SecretaryMr. Alvarez, General CounselMr. Baxter,1 Deputy General CounselMr. Sheets, Economist Mr. Stockton, Economist Messrs. Altig, Clouse, Connors, Slifman, Sullivan, and Wilcox, Associate Economists Mr. Sack, Manager, System Open Market Account Ms. Johnson, Secretary of the Board, Office of the Secretary, Board of Governors Ms. George, Acting Director, Division of Banking Supervision and Regulation, Board of Governors Mr. Frierson,1 Deputy Secretary, Office of the Secretary, Board of Governors Mr. Struckmeyer, Deputy Staff Director, Office of the Staff Director for Management, Board of Governors Mr. English, Deputy Director, Division of Monetary Affairs, Board of Governors Ms. Robertson, Assistant to the Board, Office of Board Members, Board of Governors Ms. Liang, Messrs. Reifschneider and Wascher, Senior Associate Directors, Division of Research and Statistics, Board of Governors Mr. Meyer, Senior Adviser, Division of Monetary Affairs, Board of Governors Messrs. Leahy and Nelson,1 Associate Directors, Divisions of International Finance and Monetary Affairs, respectively, Board of Governors Mr. Carpenter, Deputy Associate Director, Division of Monetary Affairs, Board of Governors Mr. Small, Project Manager, Division of Monetary Affairs, Board of Governors Ms. Wei, Economist, Division of Monetary Affairs, Board of Governors Ms. Beattie,1 Assistant to the Secretary, Office of the Secretary, Board of Governors Ms. Low, Open Market Secretariat Specialist, Division of Monetary Affairs, Board of Governors Mr. Lyon, First Vice President, Federal Reserve Bank of Minneapolis Mr. Sniderman, Executive Vice President, Federal Reserve Bank of Cleveland Mr. McAndrews,1 Ms. McLaughlin, Messrs. Rudebusch, Sellon, Tootell, and Waller, Senior Vice Presidents, Federal Reserve Banks of New York, New York, San Francisco, Kansas City, Boston, and St. Louis, respectively Messrs. Burke, Dotsey, Koenig, and Pesenti, Vice Presidents, Federal Reserve Banks of New York, Philadelphia, Dallas, and New York, respectively Mr. Weber, Senior Research Officer, Federal Reserve Bank of Minneapolis Mr. Hetzel, Senior Economist, Federal Reserve Bank of Richmond Developments in Financial Markets and the Federal Reserve's Balance Sheet The Manager of the System Open Market Account reported on recent developments in domestic and foreign financial markets. The Manager also reported on System open market operations in Treasury securities, agency debt, and agency mortgage-backed securities (MBS) since the Committee's June 23-24 meeting. By unanimous vote, the Committee ratified those transactions. There were no open market operations in foreign currencies for the System's account during the intermeeting period. The Federal Reserve's total assets were about unchanged, on balance, since the Committee met in June, remaining at approximately $2 trillion as the System's purchases of securities were essentially matched by a further decline in usage of the System's credit and liquidity facilities. Meeting participants again discussed the merits of including agency MBS backed by adjustable-rate mortgages (ARMs) in the Committee's MBS purchase program: Some thought it would be useful to include agency ARM MBS, noting that doing so could reduce the unusually large spreads between ARM rates and yields on similar-duration Treasury securities--spreads that were far larger than the comparable spreads on fixed-rate mortgages; others saw little potential benefit, given the small stock and limited issuance of ARM MBS, and were hesitant to involve the Federal Reserve in another market segment. The Committee made no decision on purchasing ARM MBS at this meeting. Participants also discussed the merits of progressively reducing the pace at which the Federal Reserve buys Treasury securities, agency debt, and agency MBS prior to the end of the asset purchase programs. They generally were of the view that gradually slowing the pace of the Committee's purchases of $300 billion of Treasury securities and extending their completion to the end of October could help promote a smooth transition in markets. A number of participants noted that a similar tapering of agency debt and MBS purchases could be helpful in the future as those programs approach completion. The Committee made no decisions on tapering those purchases at this meeting. The staff presented an update on the continuing development of several tools that could help support a smooth withdrawal of policy accommodation at the appropriate time. These measures include executing reverse repurchase agreements on a large scale, potentially with counterparties other than the primary dealers; implementing a term deposit facility that would be available to depository institutions in order to reduce the supply of excess reserves; and taking steps to tighten the link between the interest rate paid on reserve balances held at the Federal Reserve Banks and the federal funds rate. Several participants noted the need to continue refining the Committee's strategy for an eventual withdrawal of policy accommodation. The staff also updated the Committee on developments in the Term Asset-Backed Securities Loan Facility (TALF), summarized the pros and cons of expanding the range of collateral eligible for TALF loans, and recommended extending the final date for making new TALF loans into 2010. Participants generally supported the extension of TALF into 2010 but were skeptical about expanding the range of assets at this time. Secretary's note: As announced on August 17, 2009, the Board of Governors subsequently approved an extension of the TALF while holding in abeyance any further expansion in the types of collateral eligible for the TALF. Staff Review of the Economic SituationThe information reviewed at the August 11-12 meeting suggested that overall economic activity was stabilizing after a contraction in real gross domestic product (GDP) during 2008 and early 2009 that the Bureau of Economic Analysis recently reported to have been greater than it had previously estimated. Employment continued to move lower through July, but the pace of job losses had slowed noticeably in recent months. A sizable pickup in motor vehicle production appeared to be under way. Housing activity apparently was beginning to turn up. Consumer spending dropped only a little further in the first half of this year, on balance, after falling sharply in the second half of last year. The decline in equipment and software (E&S) investment seemed to be moderating, although the incoming data did not point to an imminent recovery. The sharp cuts in production this year reduced inventory stocks significantly, though they remained high relative to the level of sales. A jump in gasoline prices pushed up overall consumer price inflation in June, but core consumer price inflation remained relatively stable in recent months. Job losses continued to abate in July, and aggregate hours of production and nonsupervisory workers were unchanged. The step-up in motor vehicle assemblies boosted employment in that industry; job losses decreased in a number of other manufacturing industries, and factory workweeks generally rose. Employment declines in business and financial services in July were also smaller than those in recent months. Payrolls in nonbusiness services posted their third monthly gain, supported by the continued uptrend in health and education and a small gain in the leisure and hospitality industry. However, job losses in the construction industry continued at about the recent rate. In the household survey, the unemployment rate edged down in July to 9.4 percent, while the labor force participation rate fell back to its March level. Other indicators also suggested a reduced pace of deterioration in labor demand. Both initial claims for unemployment insurance and insured unemployment moved down since June. However, with labor markets still quite slack, year-over-year growth in average hourly earnings of production and nonsupervisory workers slowed further in July. The contraction in industrial production slowed markedly in the second quarter, although the rate of decline remained rapid and the factory utilization rate recorded a new low in June. The moderation in the pace of decline in industrial production in the second quarter was widespread across industries and major market groups. Available indicators suggested that industrial production increased noticeably in July, led by motor vehicle assemblies; manufacturing output excluding motor vehicles likely also rose in July. Real personal consumption expenditures (PCE) edged down in June after holding steady in May and declining in April. Apart from a jump in motor vehicle purchases, which were boosted appreciably by the government's "cash-for-clunkers" program, indicators of consumer spending in July were mixed. Most determinants of spending remained weak on balance. In particular, the weak labor market continued to place significant strains on household income, and earlier declines in net worth were still holding back spending. However, household net worth received a boost from the rise in equity prices since their low in March. In addition, the July Senior Loan Officer Opinion Survey on Bank Lending Practices indicated that the fraction of banks tightening standards and terms for consumer credit had diminished further. Moreover, measures of consumer sentiment, though they recently retraced a portion of their earlier gains, remained well above levels seen at the turn of the year. Data from the housing sector indicated that construction activity appeared to be emerging from its extended decline. Single-family housing starts registered a sizable increase in June, and the number of starts stood well above the record low recorded in the first quarter of this year. However, in the much smaller multifamily sector, starts continued to decline, on net, in 2009 after falling significantly in the second half of 2008 amid tight credit conditions and rapidly deteriorating demand fundamentals for apartment buildings. The latest sales data suggested that demand for new houses may be strengthening after stabilizing in the early portion of this year. Although sales remained quite modest, they were enough, given the very slow pace of production, to pare the overhang of unsold new single-family houses: In June, these inventories stood at about one-half of their peak in the summer of 2006, and the months' supply of new homes was down considerably from its record high in January. Sales of existing single-family houses, which were fairly flat early in the year, posted their third consecutive monthly increase in June, and pending home sales agreements through June suggested that resale activity would rise further in the months ahead. Sales of existing homes had been supported for much of the year by heightened volumes of transactions involving bank-owned and other distressed properties; the uptick in May and June, however, appeared to have been driven by an increase in transactions of non-distressed properties. The apparent stabilization in housing demand seen in recent months was likely due, in part, to improvements in housing affordability stemming from low interest rates for conforming mortgages and lower house prices. Real investment in E&S continued to contract in the second quarter; however, the estimated rate of decline was substantially smaller than in the previous two quarters. Business outlays on motor vehicles leveled off in the second quarter after an extended period of steep declines. Real spending in the high-tech sector declined, although real outlays for computing equipment posted their first gain in a year. Outside of high-tech and transportation, real spending on equipment dropped again in the second quarter but at a slower pace than in the previous quarter. Although the fundamental determinants of investment in E&S remained weak, conditions appeared less unfavorable, on balance, than earlier in the year. In particular, the decline in business output was less pronounced in the second quarter than in prior quarters, and estimates of the user cost of capital fell back somewhat in the second quarter after spiking last year. Other forward-looking indicators generally improved, but they remained at levels consistent with a weak outlook for E&S investment. Corporate bond spreads over Treasury securities continued to ease, and monthly surveys of business conditions and sentiment generally were less downbeat than earlier in the year. In addition, the July Senior Loan Officer Opinion Survey reported that the net percentage of banks that had tightened standards and terms on commercial and industrial (C&I) loans receded somewhat, although the July National Federation of Independent Business survey showed that the share of small businesses reporting increased difficulty in obtaining credit remained high. Conditions in the nonresidential construction sector generally remained quite poor, with spending in most major categories staying on a downward trajectory through June. Vacancy rates continued to rise, property prices fell further, and, as indicated by the July Senior Loan Officer Opinion Survey, financing for nonresidential construction projects became even tighter. In May, the U.S. international trade deficit narrowed to its lowest level since 1999, as exports increased moderately and imports declined. The increase in exports of goods and services was led by a climb in exports of industrial supplies, particularly of petroleum products, and reflected both higher prices and greater volumes. The value of imports of goods and services fell at a slower pace than in April. Imports of petroleum products exhibited the largest decline, with the fall wholly reflecting lower volumes, as petroleum prices rose. Imports of services and automotive products moved down somewhat, while non-oil industrial supplies were largely unchanged. Overall imports of consumer goods were also about unchanged, as a large decline in pharmaceuticals offset increases in a number of other goods. In contrast, imports of computers moved up strongly in May. Recent indicators of economic activity in the advanced foreign economies suggested that the pace of contraction in those countries moderated further. Purchasing managers indexes continued to rebound but did not yet point to expansion for all countries. Industrial production, while remaining well below pre-crisis levels, moved up strongly in Japan and edged up in the euro area and in the United Kingdom. Indicators of economic sentiment also improved. However, labor market conditions continued to deteriorate, and credit standards remained generally tight. In emerging market economies, recent data showed that economic activity surged across emerging Asia in the second quarter. Real GDP rebounded sharply in China and South Korea, and the preliminary estimate in Singapore indicated a substantial increase. In China, policy stimulus lifted activity and thus helped boost China's imports, primarily from other countries in Asia. Indicators for these other countries also pointed to a strong rebound in the second quarter. Activity remained depressed in Mexico, partly reflecting the adverse effect of a swine flu outbreak. In contrast, activity in Brazil appeared to have begun to recover. In the United States, overall PCE prices rose in June following little change in each of the previous three months. The increase largely reflected a sizable increase in gasoline prices, which appeared to have caught up with earlier increases in crude oil prices. The latest available survey data showed that gasoline prices flattened out, on net, in July. Excluding food and energy, PCE prices moved up moderately in June. For the second quarter as a whole, core inflation picked up from the pace in the first quarter, which had been revised down because of smaller increases in the imputed prices of nonmarket services. Median year-ahead inflation expectations in the Reuters/University of Michigan Survey of Consumers held relatively steady in July, as in recent months. Longer-term inflation expectations were about the same as the average over 2008. The producer price index for core intermediate materials turned up in June following a string of monthly declines that likely reflected the pass-through of the large declines in spot prices of commodities in the second half of last year. All measures of hourly compensation and wages suggested that labor costs decelerated markedly this year in response to the considerable deterioration in labor market conditions. Staff Review of the Financial SituationThe decisions by the Federal Open Market Committee (FOMC) at the June meeting to leave the target range for the federal funds rate unchanged and to maintain the sizes of its large-scale asset purchase programs, along with the accompanying statement, were broadly in line with market expectations. However, investors initially marked up their expected path for the federal funds rate following the release of the statement, as they apparently interpreted it as suggesting a more favorable assessment of prospects for economic growth than had been anticipated. Subsequently, investors revised down the expected policy path after the June employment report and the Chairman's semiannual monetary policy testimony. These declines were more than offset by the favorable economic information received toward the end of the intermeeting period, including the stronger-than-expected July employment report. On net, the market-implied path of the federal funds rate ended the period about the same as at the time of the June FOMC meeting. Yields on nominal Treasury securities were also little changed, on balance, over the intermeeting period, though there were sizable intraday movements in response to macroeconomic data releases and Federal Reserve communications. Inflation compensation based on five-year Treasury inflation-protected securities (TIPS) declined, on net, over the intermeeting period, while five-year inflation compensation five years ahead rose somewhat. Liquidity in the TIPS market reportedly continued to be poor, making unclear the extent to which movements in TIPS inflation compensation reflected changes in investors' expectations of future inflation. Functioning in short-term funding markets generally showed further improvement over the intermeeting period. Consistent with reduced concerns about the financial condition of large banking institutions, London interbank offered rates (Libor) continued to edge down. Three- and six-month Libor-OIS (overnight index swap) spreads--while still somewhat elevated by historical standards--declined a bit further and stood at levels last recorded in early 2008. Bid-asked spreads for most types of repurchase agreements edged down. Since June, spreads on A2/P2-rated commercial paper and AA-rated asset-backed commercial paper were little changed, on net, remaining at the low ends of their ranges over the past two years. Indicators of Treasury market functioning were little changed over the intermeeting period, and functioning continued to be somewhat impaired. Bid-asked spreads held roughly steady, and trading volumes remained low. The on-the-run liquidity premium for the 10-year Treasury note was little changed at elevated levels, although it was well below its peak last fall. Broad stock price indexes rose, on net, over the intermeeting period, as investors responded to strong second-quarter earnings reports and indications that the economy may be stabilizing. The spread between an estimate of the expected real equity return over the next 10 years for S&P 500 firms and an estimate of the real 10-year Treasury yield--a rough gauge of the equity risk premium--narrowed a bit more but remained high by recent historical standards. Option-implied volatility on the S&P 500 index also dropped a bit further. Yields on BBB-rated and speculative-grade corporate bonds declined over the intermeeting period. As a result, corporate bond spreads narrowed further and dropped below the previous peak levels reached in 2002 following the 2001 recession. Conditions in the leveraged loan market continued to improve as secondary-market prices rose further and bid-asked spreads narrowed. Investor sentiment toward the financial sector improved further over the intermeeting period, boosted, in part, by better-than-expected second-quarter earnings results at larger banking institutions. Over the period, bank equity prices rose, and credit default swap spreads on financial firms declined. Nonetheless, some investors commented that the positive upside surprises at large financial institutions were mostly related to investment banking and trading activities, which may not provide a stable source of earnings, and to mortgage refinancing activity, which may recede if longer-term rates rise. Market participants also focused on the large consumer loan losses reported by many banks. The financial condition of CIT Group, Inc., one of the largest lenders to middle-market firms, worsened sharply over the period, but broader financial market conditions appeared to be largely unaffected by this development. The level of private domestic nonfinancial sector debt apparently declined again in the second quarter, as household debt was estimated to have dropped and nonfinancial business debt appeared to have been essentially unchanged. Gross issuance of speculative- and investment-grade bonds by nonfinancial corporations slowed in July from its outsized second-quarter pace. Issuance of institutional loans in the syndicated leveraged loan market reportedly remained extremely weak in July, while bank loans and commercial paper continued to run off, leaving net debt financing by nonfinancial corporations at around zero. In contrast, the federal government issued debt at a rapid clip, and state and local government debt was estimated to have expanded moderately. Commercial bank credit contracted further in June and July. All major loan categories declined, apparently reflecting the combined effects of weaker demand for most types of loans, some substitution from bank loans to other funding sources, and an ongoing tightening of lending standards and terms. Commercial and industrial lending dropped steeply amid subdued origination activity and broad-based paydowns of outstanding loans. In the July Senior Loan Officer Opinion Survey, respondents indicated that the most important reasons for the decline in C&I loans in 2009 were weaker demand from creditworthy borrowers and the deterioration in credit quality that had reduced the number of firms that respondents viewed as creditworthy. The contraction in commercial real estate (CRE) lending accelerated. Large fractions of respondents to the July survey again noted that they had tightened standards and that the demand for CRE loans had weakened further. M2 was little changed, on net, in June and July. Retail money market mutual funds and small time deposits dropped significantly in June and were estimated to have contracted again in July, likely reflecting the very low rates of interest on these assets and a continued reallocation of wealth toward riskier assets. These declines were partly offset by a net increase in liquid deposits, also suggesting some portfolio reallocation within M2 assets. Currency expanded weakly, apparently because of soft foreign demand. The tone of financial markets abroad improved further during the intermeeting period. Stock markets rose globally, as positive U.S. earnings reports and news of strong economic rebounds in emerging Asian economies reportedly lifted investor sentiment. European bank stocks rose especially rapidly, spurred by reports of better-than-expected earnings among some European banks as well as some U.S. financial institutions. The dollar depreciated mildly on a trade-weighted basis since late June. The European Central Bank (ECB), the Bank of England, the Bank of Canada, and the Bank of Japan kept their respective policy rates constant over the intermeeting period. However, overnight interest rates in the euro area declined in the wake of the June 24 injection by the ECB of one-year funds at a fixed rate of 1 percent. The ECB also began its purchases of covered bonds, and yields on intermediate-term European covered bonds declined since the purchases began in early July. After leaving the size of its Asset Purchase Facility (APF) unchanged at its July meeting, the Bank of England, at its August meeting, raised the size of the APF to £175 billion and widened the set of gilts it would purchase. Benchmark gilt yields fell noticeably on the announcement after moving higher in July. Staff Economic OutlookIn the forecast prepared for the August FOMC meeting, the staff's outlook for the change in real activity over the next year and a half was essentially the same as at the time of the June meeting. Consumer spending had been on the soft side lately. The new estimates of real disposable income that were reported in the comprehensive revision to the national income and product accounts showed a noticeably slower increase in 2008 and the first half of 2009 than previously thought. By themselves, the revised income estimates would imply a lower forecast of consumer spending in coming quarters. But this negative influence on aggregate demand was roughly offset by other factors, including higher household net worth as a result of the rise in equity prices since March, lower corporate bond rates and spreads, a lower dollar, and a stronger forecast for foreign economic activity. All told, the staff continued to project that real GDP would start to increase in the second half of 2009 and that output growth would pick up to a pace somewhat above its potential rate in 2010. The projected increase in production in the second half of 2009 was expected to be the result of a slowing in the pace of inventory liquidation; final sales were not projected to increase until 2010. The step-up in economic activity in 2010 was expected to be supported by an ongoing improvement in financial conditions, which, along with accommodative monetary policy, was projected to set the stage for further improvements in household and business sentiment and an acceleration in aggregate demand. The staff forecast for inflation was also about unchanged from that at the June meeting. Interpretation of the incoming data on core PCE inflation was complicated by changes in the definition of the core measure recently implemented by the Bureau of Economic Analysis, as well as by unusually low readings for some nonmarket components of the price index.2 After accounting for these factors, the underlying pace of core inflation seemed to be running a little higher than the staff had anticipated. Survey measures of inflation expectations showed no significant change. Nonetheless, with the unemployment rate anticipated to increase somewhat during the remainder of 2009 and to decline only gradually in 2010, the staff still expected core PCE inflation to slow substantially over the forecast period; the very low readings on hourly compensation lately suggested that such a process might already be in train. Participants' Views on Current Conditions and the Economic Outlook In their discussion of the economic situation and outlook, meeting participants agreed that the incoming data and anecdotal evidence had strengthened their confidence that the downturn in economic activity was ending and that growth was likely to resume in the second half of the year. Many noted that their baseline projections for the second half of 2009 and for subsequent years had not changed appreciably since the Committee met in June but that they now saw smaller downside risks. Consumer spending appeared to be in the process of leveling out, and activity in a number of local housing markets had stabilized or even increased somewhat. Reports from business contacts supported the view that firms were making progress in bringing inventories into better alignment with their reduced sales and that production was stabilizing in many sectors--albeit at low levels--and beginning to rise in some. Nonetheless, most participants saw the economy as likely to recover only slowly during the second half of this year, and all saw it as still vulnerable to adverse shocks. Conditions in the labor market remained poor, and business contacts generally indicated that firms would be quite cautious in hiring when demand for their products picks up. Moreover, declines in employment and weakness in growth of labor compensation meant that income growth was sluggish. Also, households likely would continue to face unusually tight credit conditions. These factors, along with past declines in wealth that had been only partly offset by recent increases in equity prices, would weigh on consumer spending. The data and business contacts indicated very substantial excess capacity in many sectors; this excess capacity, along with the tight credit conditions facing many firms, likely would mean further weakness in business fixed investment for a time. Even so, less-aggressive inventory cutting and continuing monetary and fiscal policy stimulus could be expected to support growth in production during the second half of 2009 and into 2010. In addition, the outlook for foreign economies had improved somewhat, auguring well for U.S. exports. Participants expected the pace of recovery to pick up in 2010, but they expressed a range of views, and considerable uncertainty, about the likely strength of the upturn--particularly about the pace of projected gains in consumer spending and the extent to which credit conditions would normalize. Most participants anticipated that substantial slack in resource utilization would lead to subdued and potentially declining wage and price inflation over the next few years; a few saw a risk of substantial disinflation. However, some pointed to the problems in measuring economic slack in real time, and several were skeptical that temporarily low levels of resource utilization would reduce inflation appreciably, given the loose empirical relationship of economic slack to inflation and the fact that the public did not appear to have reduced its expectations of inflation. Participants noted concerns among some analysts and business contacts that the sizable expansion of the Federal Reserve's balance sheet and large continuing federal budget deficits ultimately could lead to higher inflation if policies were not adjusted in a timely manner. To address these concerns, it would be important to continue communicating that the Federal Reserve has the tools and willingness to begin withdrawing monetary policy accommodation at the appropriate time to prevent any persistent increase in inflation. Developments in financial markets during the intermeeting period were again seen as broadly positive; the cumulative improvement in market functioning since the spring was viewed as quite significant. Markets for corporate debt continued to improve, and private credit spreads narrowed further. With the TALF continuing to provide important support, markets for asset-backed securities also showed improvement, and recent issuance had neared levels observed prior to the second half of 2008. Higher equity prices appeared to result not only from generally better-than-expected corporate earnings, which seemed largely to reflect aggressive cost cutting, but also from a reduction in the perceived risk of extremely adverse outcomes and a consequent increase in investors' appetite for riskier assets. However, participants noted that many markets were still strained and that financial risks remain. The improvement in financial markets was due, in part, to support from various government programs, and market functioning might deteriorate as those programs wind down. While financial markets had improved, credit remained tight, with many banks--though fewer than in recent quarters--having reported that they again tightened loan standards and terms. Increases in interest rates and reductions in lines on credit cards were affecting small businesses as well as consumers. All categories of bank lending had continued to decline. Worsening credit quality was still cited by banks as an important reason for the tightening of credit conditions, though anecdotal evidence suggested that the deterioration in the credit quality of consumer loans might be slowing. Nonetheless, several participants noted that banks still faced a sizable risk of additional credit losses and that many small and medium-sized banks were vulnerable to deteriorating performance of commercial real estate loans. Participants again observed that obtaining or renewing financing for commercial real estate properties and projects was extremely difficult amid worsening fundamentals in that sector, though some noted anecdotal evidence that the addition of highly rated commercial MBS to the list of securities that can be pledged as collateral for TALF loans had contributed to an improvement in liquidity in that market. Labor market conditions remained of particular concern to meeting participants. Though recent data indicated that the pace at which employment was declining had slowed appreciably, job losses remained sizable. Moreover, long-term unemployment and permanent separations continued to rise, suggesting possible problems of skill loss and a need for labor reallocation that could slow recovery in employment as the economy begins to expand. The unusually large fraction of those who were working part time for economic reasons and the unusually low level of the average workweek, combined with indications from business contacts that firms would resist hiring as sales and production turn up, also pointed to a period of modest job gains and thus a slow decline in the unemployment rate. Wages and benefits continued to decelerate, reflecting--in the judgment of many participants--substantial slack in labor markets. Several participants noted that the deceleration in labor costs should eventually support a pickup in hiring. Recently, however, it contributed to weakness in household incomes. Consumer spending remained weak, but participants saw evidence that it was stabilizing, even before the boost to auto purchases provided by the cash-for-clunkers program. Real PCE declined little, on balance, during the first half of 2009 after dropping sharply during the second half of 2008 and was essentially constant during May and June. Several participants noted the recent rebound in equity prices and thus household wealth as a factor that was likely to support consumer spending. Many noted, however, that households still faced considerable headwinds, including reduced wealth, tight credit, high levels of debt, and uncertain job prospects. With these forces restraining spending, and with labor income likely to remain soft, participants generally expected no more than moderate growth in consumer spending going forward. An important source of uncertainty in the outlook for consumer spending was whether households' propensity to save, which had risen in recent quarters, would increase further: Analysis based on responses to past changes in wealth relative to income suggested that the personal saving rate could level out near its current value; however, there was some chance that the increased income volatility and reduced access to credit that had characterized recent experience could lead households to save a still-larger fraction of their incomes. Regional surveys and anecdotal reports continued to indicate low levels of activity across many goods-producing industries and in the service sector, but they also pointed to some optimism about the outlook. Firms appeared to be making substantial progress in reducing inventories toward desired levels; indeed, inventories of motor vehicles appeared quite lean following earlier production shutdowns and the recent boost to sales from the cash-for-clunkers program. Accordingly, participants expected firms to slow the pace of inventory reduction by raising production; this adjustment was likely to make an important contribution to economic recovery in the second half of this year. In contrast, business contacts generally reported setting a high bar for increasing capital investment once sales pick up, because their firms now have unusually high levels of excess capacity. In the residential real estate sector, home sales, prices, and construction had shown signs of stabilization in many areas and were increasing modestly in others, but a still-sizable inventory of unsold existing homes continued to restrain homebuilding. Commercial real estate activity, in contrast, was being weighed down by deteriorating fundamentals, including declining occupancy and rental rates; by falling prices; and by difficulty in refinancing loans on existing properties. Manufacturing firms appeared to have benefitted recently from an earlier- and stronger-than-expected pickup in foreign economic activity, especially in Asia, and the resulting increase in demand for U.S. exports. Several participants noted that improving growth abroad would likely contribute to greater growth in U.S. exports going forward. A number of participants noted that fiscal policy helped support the stabilization in economic activity, in part by buoying household incomes and by preventing even larger cuts in state and local government spending. Participants generally anticipated that fiscal stimulus already in train would contribute to growth in economic activity during the second half of 2009 and into 2010, but the stimulative effects of policy would fade as 2010 went on and would need to be replaced by private demand and income growth. Committee Policy Action In their discussion of monetary policy for the period ahead, Committee members agreed that the stance of monetary policy should not be changed at this meeting. Given the prospects for an initially modest economic recovery, substantial resource slack, and subdued inflation, the Committee agreed that it should maintain its target range for the federal funds rate at 0 to 1/4 percent. The future path of the federal funds rate would continue to depend on the Committee's evolving outlook, but, for now, given their forecasts for only a gradual upturn in economic activity and subdued inflation, members thought it most likely that the federal funds rate would need to be maintained at an exceptionally low level for an extended period. With the downside risks to the economic outlook now considerably reduced but the economic recovery likely to be damped, the Committee also agreed that neither expansion nor contraction of its program of asset purchases was warranted at this time. The Committee did, however, decide to gradually slow the pace of the remainder of its purchases of $300 billion of Treasury securities and extend their completion to the end of October to help promote a smooth transition in markets. Members noted that, with the programs for purchases of agency debt and MBS not due to expire until the end of the year, it was not necessary to make decisions at this meeting about any potential modifications to those programs. The Committee agreed that it would continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to purchase agency debt, agency MBS, and longer-term Treasury securities during the intermeeting period with the aim of providing support to private credit markets and economic activity. The timing and pace of these purchases should depend on conditions in the markets for such securities and on a broader assessment of private credit market conditions. The Desk is expected to purchase up to $200 billion in housing-related agency debt and up to $1.25 trillion of agency MBS by the end of the year. The Desk is expected to purchase about $300 billion of longer-term Treasury securities by the end of October, gradually slowing the pace of these purchases until they are completed. The Committee anticipates that outright purchases of securities will cause the size of the Federal Reserve's balance sheet to expand significantly in coming months. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability." The vote encompassed approval of the statement below to be released at 2:15 p.m.: "Information received since the Federal Open Market Committee met in June suggests that economic activity is leveling out. Conditions in financial markets have improved further in recent weeks. Household spending has continued to show signs of stabilizing but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing but are making progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability. The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time. In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve is in the process of buying $300 billion of Treasury securities. To promote a smooth transition in markets as these purchases of Treasury securities are completed, the Committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted." Voting for this action: Messrs. Bernanke and Dudley, Ms. Duke, Messrs. Evans, Kohn, Lacker, Lockhart, Tarullo, and Warsh, and Ms. Yellen. Voting against this action: None. It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, September 22-23, 2009. The meeting adjourned at 11:40 a.m. on August 12, 2009. Notation VoteBy notation vote completed on July 14, 2009, the Committee unanimously approved the minutes of the FOMC meeting held on June 23-24, 2009. _____________________________Brian F. MadiganSecretary 1. Attended Tuesday's session only. Return to text 2. As part of the July 2009 comprehensive revision of the national income and product accounts, the Bureau of Economic Analysis reclassified restaurant meals from the food category to the services category. As a result, the price index for PCE excluding food and energy (the core PCE price index) now includes prices of restaurant meals. Return to text Return to top

2009-08-11

Statement

Information received since the Federal Open Market Committee met in June suggests that economic activity is leveling out. Conditions in financial markets have improved further in recent weeks. Household spending has continued to show signs of stabilizing but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing but are making progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability. The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time. In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve is in the process of buying $300 billion of Treasury securities. To promote a smooth transition in markets as these purchases of Treasury securities are completed, the Committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted. Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

2009-07-15

Minute

A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held in the offices of the Board of Governors in Washington, D.C., on Tuesday, June 23, 2009, at 1:00 p.m. and continued on Wednesday, June 24, 2009, at 9:00 a.m. PRESENT:Mr. Bernanke, ChairmanMr. Dudley, Vice ChairmanMs. DukeMr. EvansMr. KohnMr. LackerMr. LockhartMr. Tarullo Mr. WarshMs. Yellen Messrs. Bullard and Hoenig, Ms. Pianalto, and Mr. Rosengren, Alternate Members of the Federal Open Market Committee Messrs. Fisher, Plosser, and Stern, Presidents of the Federal Reserve Banks of Dallas, Philadelphia, and Minneapolis, respectively Mr. Madigan, Secretary and EconomistMs. Danker, Deputy SecretaryMr. Luecke, Assistant SecretaryMr. Skidmore, Assistant SecretaryMs. Smith, Assistant SecretaryMr. Alvarez,1 General CounselMr. Baxter, Deputy General CounselMr. Sheets, Economist Mr. Stockton, Economist Messrs. Altig, Clouse, Connors, Kamin, Slifman, Weinberg, and Wilcox, Associate Economists Mr. Sack, Manager, System Open Market Account Ms. Johnson, Secretary of the Board, Office of the Secretary, Board of Governors Mr. Frierson,1 Deputy Secretary, Office of the Secretary, Board of Governors Mr. Struckmeyer, Deputy Staff Director, Office of the Staff Director for Management, Board of Governors Mr. English, Deputy Director, Division of Monetary Affairs, Board of Governors Mr. Blanchard, Assistant to the Board, Office of Board Members, Board of Governors Messrs. Greenlee, Nelson, Reifschneider, and Wascher, Associate Directors, Divisions of Banking Supervision and Regulation, Monetary Affairs, Research and Statistics, and Research and Statistics, respectively, Board of Governors Mr. Gagnon, Visiting Associate Director, Division of Monetary Affairs, Board of Governors Mr. Oliner, Senior Adviser, Division of Research and Statistics, Board of Governors Messrs. Carpenter and Perli, Deputy Associate Directors, Division of Monetary Affairs, Board of Governors Mr. Kiley, Assistant Director, Division of Research and Statistics, Board of Governors Mr. Small, Project Manager, Division of Monetary Affairs, Board of Governors Ms. Lindner, Group Manager, Division of Research and Statistics, Board of Governors Mr. Wood, Senior Economist, Division of International Finance, Board of Governors Messrs. Driscoll, King,¹ and McCarthy, Economists, Division of Monetary Affairs, Board of Governors Ms. Beattie, Assistant to the Secretary, Office of the Secretary, Board of Governors Ms. Low, Open Market Secretariat Specialist, Division of Monetary Affairs, Board of Governors Messrs. Fuhrer and Rosenblum, Executive Vice Presidents, Federal Reserve Banks of Boston and Dallas, respectively Mr. Judd, Advisor to the President, Federal Reserve Bank of San Francisco Messrs. Feldman, Hilton, Krane, McAndrews, Mses. Mester and Mosser, and Messrs. Schweitzer, Sellon, and Waller, Senior Vice Presidents, Federal Reserve Banks of Minneapolis, New York, Chicago, New York, Philadelphia, New York, Cleveland, Kansas City, and St. Louis, respectively Ms. Logan, Vice President, Federal Reserve Bank of New York Developments in Financial Markets and the Federal Reserve's Balance SheetThe Manager of the System Open Market Account (SOMA) reported on recent developments in domestic and foreign financial markets. The Manager also reported on System open market operations in Treasury securities and in agency debt and agency mortgage-backed securities (MBS) during the period since the Committee's April 28-29 meeting. By unanimous vote, the Committee ratified those transactions. There were no open market operations in foreign currencies for the System's account over the intermeeting period. The Committee reviewed a staff proposal that would authorize the Desk to lend, as part of the Federal Reserve's regular overnight securities lending operations, securities held in the SOMA portfolio that are direct obligations of federal agencies. Lending agency securities was viewed as a technical modification to the existing overnight securities lending program that would support functioning of agency debt markets. The Committee voted unanimously to amend paragraph 3 of the Authorization for Domestic Open Market Operations with the text underlined below. "3. In order to ensure the effective conduct of open market operations, the Federal Open Market Committee authorizes the Federal Reserve Bank of New York to lend on an overnight basis U.S. Government securities and securities that are direct obligations of any agency of the United States, held in the System Open Market Account, to dealers at rates that shall be determined by competitive bidding. The Federal Reserve Bank of New York shall set a minimum lending fee consistent with the objectives of the program and apply reasonable limitations on the total amount of a specific issue that may be auctioned and on the amount of securities that each dealer may borrow. The Federal Reserve Bank of New York may reject bids which could facilitate a dealer's ability to control a single issue as determined solely by the Federal Reserve Bank of New York." The staff reported on projections of the Federal Reserve's balance sheet under various assumptions about economic and financial conditions and the associated path of monetary policy. Staff projections suggested that the size of the Federal Reserve's balance sheet might peak late this year and decline gradually thereafter. The staff also presented information on the possible implications of substantial changes in the size and composition of the Federal Reserve's balance sheet for the System's net income. The analysis indicated that the Federal Reserve was likely to earn substantial net interest income over the next few years under most interest rate scenarios. The staff presented one scenario, however, in which aggressive increases in short-term interest rates significantly reduced System net income relative to a baseline scenario. The analysis also suggested that the market value of the Federal Reserve's securities holdings could decline appreciably under some scenarios. However, while the Federal Reserve would retain the option of selling securities before they mature or are prepaid as a means of tightening policy when appropriate, it was not expected to have to do so. Changes in market valuations were thus seen as unlikely to have significant implications for the System's net income. In a related discussion, the staff briefed the Committee on a number of possible tools that the Federal Reserve might employ to foster effective control of the federal funds rate in the context of a much expanded balance sheet. Some of those tools were focused primarily on shaping or strengthening the demand for reserves, while others were designed to provide greater control over the supply of reserves. In discussing the staff presentation, meeting participants generally agreed that the Federal Reserve either already had or could develop tools to remove policy accommodation when appropriate. Ensuring that policy accommodation can ultimately be withdrawn smoothly and at the appropriate time would remain a top priority of the Federal Reserve. The staff also provided the Committee with an analysis of the potential adverse effects of very high reserve balances on bank capital ratios. An important issue was whether the further increase in reserve balances that is likely to result from the Federal Reserve's already-announced program of asset purchases could lead banks to limit their lending and acquisition of securities in order to prevent an excessive decline in their capital ratios. The analysis concluded that, with few exceptions, banks' regulatory leverage ratios (defined as tier 1 capital divided by total average assets) were likely to remain comfortably above regulatory minimums, even with the substantial growth in reserve balances projected to occur in coming months and even if there were some erosion in bank capital. In part, that result reflected the fact that many institutions had raised capital lately; in addition, the leverage ratios for most institutions were well above the regulatory minimums at the end of the first quarter. The staff also reviewed the experience to date with the Federal Reserve's purchases of Treasury securities, agency debt securities, and agency MBS. A number of potential modifications to those programs were presented for the Committee's consideration, including possible expansions in their size, extensions of the duration of securities purchased, steps to increase the flexibility of those purchases both within each program and across programs in response to short-term market developments, and possible approaches to winding down purchases as the programs near completion. The Federal Reserve was already purchasing a very large fraction of new current-coupon agency MBS and agency debt, and further increasing the scale of those programs could compromise market functioning. Some participants thought that increases in purchases of Treasury securities might have little or no effect on long-term interest rates unless the increases were very sizable, given the large amount of current and projected supply of Treasury securities. Others were concerned that announcements of substantial additional purchases could add to perceptions that the federal debt was being monetized. While most members did not see large-scale purchases of Treasury securities as likely to be a source of inflation pressures given the weak economic outlook, public concern about monetization could have adverse implications for inflation expectations. The asset purchase programs were intended to support economic activity by improving market functioning and reducing interest rates on mortgage loans and other long-term credit to households and businesses relative to what they otherwise would have been. But the Committee had not set specific objectives for longer-term interest rates, and participants did not consider it appropriate to allow the Desk discretion to adjust the size and composition of the Federal Reserve's asset purchases in response to short-run fluctuations in market interest rates. Some participants noted that, in principle, the Committee could formulate a plan for asset purchases that would respond to economic and financial developments in a way that might better promote monetary policy objectives. Most, however, thought that formulating and communicating such a plan would be very difficult, potentially leading to an increase in market uncertainty regarding Federal Reserve actions and intentions. Many participants agreed, however, that it was appropriate for the Desk to make small adjustments to the size and timing of purchases aimed at fostering market liquidity and improving market functioning. Participants discussed the merits of including securities backed by adjustable-rate mortgages in MBS purchases and of tapering off purchases of securities as the asset purchase programs were being completed, but the Committee did not reach a decision on those issues at the meeting. The staff presented policymakers with proposals for extensions, modifications, and terminations of various liquidity programs. A number of the credit and liquidity facilities that the Federal Reserve had established in the course of the financial crisis were scheduled to expire on October 30. Use of most of the liquidity facilities had declined in recent months as market conditions had improved. Still, meeting participants judged that market conditions remained fragile, and that concerns about counterparty credit risk and access to liquidity, both of which had ebbed notably in recent months, could increase again. Moreover, participants viewed the availability of the liquidity facilities as a factor that had contributed to the reduction in financial strains. If the Federal Reserve's backup liquidity facilities were terminated prematurely, such developments might put renewed pressure on some financial institutions and markets and tighten credit conditions for businesses and households. The period over year-end was seen as posing heightened risks given the usual pressures in financial markets at that time. In these circumstances, participants agreed that most facilities should be extended into early next year. However, participants also judged that improved market conditions and declining use of the facilities warranted scaling back, suspending, or tightening access to several programs, including the Term Auction Facility (TAF), the Term Securities Lending Facility (TSLF), and the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF). Following the presentation and discussion of the staff proposal, the Board voted unanimously to extend the AMLF, the Commercial Paper Funding Facility (CPFF), the Primary Dealer Credit Facility (PDCF), and the TSLF through February 1, 2010. The Board did not extend the Money Market Investor Funding Facility (MMIFF) beyond October 30. The extension of the TSLF required the approval of the Federal Open Market Committee (FOMC), as that facility was established under the joint authority of the Board and the FOMC. The Board and the FOMC jointly decided to suspend some TSLF auctions and to reduce the size and frequency of others. In addition, the FOMC extended the temporary reciprocal currency arrangements (swap lines) between the Federal Reserve and other central banks to February 1, 2010. The FOMC unanimously passed the following resolution to extend the temporary swap arrangements and the TSLF: "The Federal Open Market Committee extends until February 1, 2010, its authorizations for the Federal Reserve Bank of New York to engage in temporary reciprocal currency arrangements ("swap arrangements") with foreign central banks under the conditions previously established by the Committee. The Federal Open Market Committee extends until February 1, 2010, its authorizations for the Federal Reserve Bank of New York to provide a Term Securities Lending Facility, subject to the same collateral, interest rate, and other conditions previously established by the Committee. However, the Federal Reserve Bank of New York is directed to suspend Schedule 1 TSLF auctions, effective immediately. The Federal Reserve Bank of New York is directed to conduct Schedule 2 TSLF auctions initially on a monthly basis in amounts of $75 billion; the Reserve Bank is directed to reduce over time the amounts provided through the TSLF as market conditions warrant. The Federal Reserve Bank of New York is directed to suspend operations of the Term Securities Lending Facility Options Program (TOP), effective immediately. Should market conditions appear to warrant the resumption of Schedule 1 TSLF or TOP auctions, the Account Manager is to consult with the Chairman and, if possible, the Board and the Federal Open Market Committee." Board members and FOMC participants noted their expectation that a number of these facilities may not need to be extended beyond February 1, 2010, if the recent improvements in market conditions continue. However, if financial stresses do not moderate as expected, the Board and the FOMC were prepared to extend the terms of some or all of the facilities as needed to promote financial stability and economic growth. Staff Review of the Economic SituationThe information reviewed at the June 23-24 meeting suggested that the economy remained very weak, though declines in activity seemed to be lessening. Employment was still falling, and manufacturers had cut production further in response to excess inventories and soft demand. But the reductions in employment and industrial production had slowed somewhat, consumer spending appeared to be holding reasonably steady after shrinking in the second half of 2008, and sales and construction of single-family homes had apparently flattened out. In addition, the recent declines in capital spending were smaller than those recorded earlier in the year. Consumer price inflation was fairly quiescent in recent months, although the upturn in energy prices appeared likely to boost headline inflation in June. The demand for labor weakened further in May, albeit less rapidly than in earlier months. Nonfarm payrolls continued to shrink, but the decline was the smallest since September. In addition, average weekly hours of production and nonsupervisory workers on private payrolls, which had dropped substantially from September to March, were essentially unchanged in April and May. Thus aggregate hours worked by this group fell at a slower pace in April and May than on average over the previous seven months. The unemployment rate, however, rose further in May, to 9.4 percent. Despite the high level of joblessness, the labor force participation rate moved up for a second consecutive month to a level close to where it was at the beginning of the recession. The four-week moving average of initial claims for unemployment insurance fell back a little, but the number of individuals receiving unemployment insurance benefits continued to increase. Industrial production decreased in April and May but at a slower pace than in the first quarter. Manufacturing output also fell in those months, and the factory operating rate dipped further in May. In the high-tech sector, computer output fell at a pace similar to that in the first quarter, but near-term indicators of production turned somewhat less negative and global semiconductor sales climbed in April for the second consecutive month. The production of motor vehicles and parts dropped sharply in May, principally because of extended plant shutdowns at General Motors and Chrysler. The production of commercial aircraft moved up. Outside the transportation and high-tech sectors, most industries continued to cut production in both April and May, though at a slower pace than over the preceding five months. Real personal consumption expenditures rose somewhat in the first quarter after falling in the second half of 2008, and available data suggested that spending was holding reasonably steady in the second quarter. On the basis of the latest retail sales data, real expenditures on goods other than motor vehicles appeared to have risen slightly in May and to have changed little, on net, since the turn of the year. Sales of light motor vehicles in April and May were slightly higher than the first-quarter average. Real outlays on services were reported to have picked up some in April from the average monthly gain seen over the first three months of the year. The fundamental determinants of consumer demand appeared to have improved a bit: Despite the ongoing decline in employment, real disposable personal income rose in the first quarter and posted another sizable gain in April as various provisions of the American Recovery and Reinvestment Act of 2009 boosted transfer payments and reduced personal taxes. In addition, equity prices recorded substantial gains in April and May, reversing a small portion of the prior wealth declines. Measures of consumer sentiment, while remaining at levels typically seen during recessions, improved markedly from the historical lows recorded around the turn of the year. Single-family housing starts edged up in May, and adjusted permit issuance for single-family houses was a little above the level of starts, as it had been since January. In contrast, activity in the much smaller multifamily sector fell significantly further, reflecting a sharp deterioration in the fundamentals in that sector. The steep decline in the demand for new single-family houses seemed to have abated. However, the pace of new home sales was still very low in April, and the months' supply of new homes remained quite elevated relative to sales despite a decrease in the stock of unsold new single-family homes to a level roughly one-half of its mid-2006 peak. Sales of existing single-family homes had been fairly steady from late 2008 through May. The relative stability of the resale market over this period coincided with a heightened proportion of transactions involving bank-owned and other distressed properties. The apparent stabilization in housing demand was likely due, in part, to the improvement in housing affordability that resulted from low mortgage rates and declining house prices. Rates for conforming 30-year fixed-rate mortgages rose on net between late April and late June but remained below the levels seen over most of 2008. Although the market for private-label nonprime mortgages remained closed, spreads between rates for jumbo and standard conforming loans narrowed substantially since March. Meanwhile, national house prices continued to decline. Real investment in equipment and software (E&S) continued to contract; however, the decline in the second quarter appeared likely to be smaller than in either of the two preceding quarters. Outlays on transportation equipment seemed to be firming after shrinking for an extended period, and the incoming data on shipments and orders of nondefense capital goods pointed to a moderation in the rate of decrease in other major components of E&S. The contraction in spending on computing equipment appeared to be leveling off, although businesses continued to cut their real outlays on software. Real spending on equipment outside of high-tech and transportation seemed to have dropped less rapidly in the second quarter than in the first quarter. Data suggested a substantial increase in outlays for nonresidential construction in March and April, concentrated in energy-related sectors. Outside of the energy-related sectors, demand for nonresidential building remained extremely weak and financing difficult to obtain. Although the months' supply of nonfarm business inventories remained elevated, large production cutbacks in recent quarters allowed producers to stem the rise in stocks relative to sales. The principal determinants of investment were still weak: Business output dropped further in the first quarter, the user cost of capital was higher than it was a year earlier, and credit remained tight. However, corporate bond yields eased considerably in the weeks leading to the June meeting, and monthly surveys of business conditions and sentiment were generally less downbeat than earlier in the year. The U.S. international trade deficit widened slightly in April, as a decrease in imports was more than offset by a drop in exports. Most major categories of exports fell, with exports of machinery, industrial supplies, and consumer goods exhibiting significant declines. The value of imports of goods and services also edged down after remaining about unchanged in March. Imports of machinery and industrial supplies displayed significant decreases, and imports of services fell moderately. Imports of consumer goods increased. The value of oil imports also rose, as higher prices outweighed lower volumes. The decline in output in the advanced foreign economies deepened in the first quarter. Domestic demand fell in all major economies, led by double-digit declines in fixed investment and sizable negative contributions of inventories to growth. Recent indicators, however, suggested that the pace of contraction likely moderated in the second quarter. Purchasing managers indexes rebounded from the exceptionally low levels reached in the first quarter, and industrial production stabilized somewhat. In emerging market economies, incoming data showed that first-quarter real gross domestic product (GDP) contracted sharply in Mexico, Hong Kong, Malaysia, and Singapore, edged up in Korea, and expanded considerably in India and Indonesia. For the second quarter, indicators suggested a broader stabilization of activity in emerging market economies. In China, retail sales and fixed-asset investment rose strongly. Financial conditions continued to improve in most emerging market economies. In the United States, headline consumer prices were little changed between March and May, held down by declines in the prices of food and energy over that period. Core inflation was slightly higher from March to May than during the preceding three months, although core prices posted fairly small increases apart from a tax-induced jump in tobacco prices. Near-term inflation expectations in the Reuters/University of Michigan Surveys of Consumers remained steady in May and then rose somewhat in the preliminary June survey. Survey measures of long-term inflation expectations showed no signs of moving lower despite the considerable margin of labor- and product-market slack present in the economy. At earlier stages of processing, the producer price index for core intermediate materials continued to decline through May, albeit at a slower pace than that seen at the end of 2008. Spot commodity prices, which had moved higher over the first four months of 2009, rose more rapidly since the end of April. Nevertheless, these prices remained well below their year-earlier levels. The incoming data on labor costs were mixed. Although the rise in hourly compensation in the nonfarm business sector picked up slightly in the first quarter, the employment cost index decelerated further. Increases in average hourly earnings also slowed further in April and May. Staff Review of the Financial SituationThe decision by the FOMC at its April 28-29 meeting to leave the target range for the federal funds rate unchanged and the accompanying statement indicating that the FOMC would maintain the size of the large-scale asset purchase program were largely anticipated, but yields on Treasury securities rose slightly, as a few investors apparently had seen some chance that the Committee would expand the purchase program. The release of the April FOMC minutes three weeks later prompted a reversal of this move, as market participants reportedly focused on the suggestion that the total size of the purchase program might need to be increased at some point to spur a more rapid pace of recovery. The expected path of the federal funds rate implied by futures prices was largely unchanged by the release of the Committee's statement and minutes. However, in the days following the release of the May employment report, which was read as being significantly less negative than anticipated, market participants marked up their expected path for the federal funds rate. Yields on nominal Treasury coupon securities increased, on net, over the intermeeting period. These moves likely reflected a number of factors, including investors' perceptions of an improvement in the economic outlook, decreased concerns about the risk of deflation, a reversal of flight-to-quality flows, and selling of long-duration assets as exposure to mortgage prepayment risk dropped with a rise in mortgage rates. In addition, inflation compensation rose over the intermeeting period as yields on inflation-indexed Treasury securities increased much less than those on their nominal counterparts. Some of the rise in inflation compensation may have reflected an increase in inflation expectations, but an improvement in liquidity in the market for Treasury inflation-protected securities and mortgage-related hedging flows may have boosted inflation compensation as well. Pressures in short-term bank funding markets eased further, as evidenced by declines in London interbank offered rate (Libor) fixings and in spreads between one- and three-month Libor and comparable-maturity overnight index swap (OIS) rates. These spreads narrowed to levels not seen since early 2008, transaction volume rose modestly, and tentative signs of increased liquidity reportedly emerged. The market for repurchase agreements saw slight improvement, with bid-asked spreads for most types of transactions narrowing a bit and haircuts roughly unchanged. Spreads on A2/P2-rated commercial paper and AA-rated asset-backed commercial paper were little changed, on net, since late April, remaining at the low end of their ranges over the previous 18 months. Over the intermeeting period, functioning in the market for Treasury securities generally improved and trading picked up, but some strains remained. The on-the-run/off-the-run premium narrowed considerably at the short end of the yield curve. Such spreads, however, remained somewhat wide for longer-dated issues, apparently reflecting concerns about volatility linked to mortgage-related hedging flows. Some strains, perhaps associated with these flows, emerged at times in the MBS market; market participants reacted to the large and rapid changes in MBS yields by widening bid-asked spreads on these securities. Broad stock price indexes rose, on net, over the intermeeting period, reflecting generally better-than-expected economic news and further declines in risk premiums. The spread between an estimate of the expected real equity return over the next 10 years for S&P 500 firms and an estimate of the real 10-year Treasury yield--a rough gauge of the equity risk premium--narrowed noticeably but remained high by historical standards. Option-implied volatility on the S&P 500 index declined but remained elevated. Yields on speculative-grade and investment-grade corporate bonds dropped, and spreads over yields on comparable-maturity Treasury securities narrowed considerably. Estimates of bid-asked spreads in the secondary market for speculative-grade corporate bonds fell significantly to about their average levels in the few years before the summer of 2007, while estimates of such spreads for investment-grade corporate bonds remained somewhat elevated. Market sentiment toward the syndicated leveraged loan market also improved, with the average bid price increasing noticeably and bid-asked spreads narrowing a bit further. The inclusion of commercial mortgage-backed securities (CMBS) in the Term Asset-Backed Securities Loan Facility (TALF) program resulted initially in a narrowing of commercial mortgage credit default swap (CDS) spreads; however, spreads later widened as rating agencies issued conflicting opinions regarding the credit quality of senior CMBS tranches. Market sentiment toward the financial sector improved over the intermeeting period, reflecting, in part, the release of the Supervisory Capital Assessment Program (SCAP) results for the nation's 19 largest bank holding companies (BHCs) on May 7. Nearly all the BHCs evaluated had enough Tier 1 capital to absorb the higher losses envisioned under the hypothetical more adverse scenario; however, 10 institutions were required to enhance their capital structure to put greater emphasis on common equity. Following the announcement of the SCAP results, the 19 evaluated institutions raised, or announced plans to raise, around $70 billion in common equity through public offerings, conversion of preferred stock, and asset sales. These offerings accounted for most of the record-high total financial equity issuance in May. The evaluated BHCs have also issued additional debt under the Federal Deposit Insurance Corporation's Temporary Liquidity Guarantee Program (TLGP), as well as nonguaranteed debt. On June 9, the Treasury announced that 10 large financial institutions were eligible to repay the $68 billion in capital that they had received through the Troubled Asset Relief Program (TARP). CDS spreads for banking organizations declined considerably over the intermeeting period, although they remained well above historical norms. Stock price indexes for the banking sector and the broader financial sectors rose significantly. The level of private-sector debt was estimated to have remained about unchanged in the second quarter, as a further modest decline in household debt about offset a slight increase in nonfinancial business debt. Gross bond issuance by nonfinancial corporations was robust in May. Investment-grade issuance rebounded after a lull in April. Speculative-grade issuance was the highest since June 2007, but issuance of lower-rated speculative-grade bonds remained minimal. Meanwhile, the federal government issued large amounts of debt, and state and local government debt was estimated to have expanded moderately. The expansion of M2 slowed significantly in April and May, as the reallocation of household wealth toward the safety and liquidity of M2 assets evidently moderated. Retail money market mutual funds and small time deposits contracted in both months, probably in response to declining interest rates on these assets. The rise in currency diminished, likely reflecting primarily a waning in foreign demand. Commercial bank credit increased slightly in May following six consecutive monthly declines, but the turnaround reflected a rise in securities holdings and in the volatile "other" loans category--that is, loans other than commercial and industrial (C&I), real estate, and consumer loans. C&I loans dropped in May, amid subdued origination activity and broad-based paydowns of outstanding loans. Home equity loans edged down--the first monthly decline in this category since October 2006--partly because of banks' reductions in existing lines of credit. Closed-end residential mortgages decreased; originations were reportedly strong but were more than offset by loan sales to the government-sponsored enterprises. The amount of outstanding consumer loans originated by banks shrank during April and May; the quantity of consumer loans on banks' balance sheets decreased even more because of a number of large credit card securitizations. The dollar depreciated substantially during the intermeeting period against all other major currencies. This decline appeared to be driven by a renewed sense of optimism about global growth prospects, leading investors to shift away from safe-haven assets in the United States to riskier assets elsewhere. Libor-to-OIS spreads in euros and sterling decreased, and several foreign banks took advantage of improved financial conditions to raise capital and increase issuance of debt outside of government guarantee programs. The improved access to capital markets and better economic outlook buoyed bank stocks, which helped headline equity indexes move higher. Most stock markets in emerging market economies rose considerably, and mutual fund flows into those markets strengthened. The European Central Bank lowered its main policy rate 25 basis points to 1 percent and announced that it would purchase up to €60 billion in covered bonds. The Bank of England, the Bank of Canada, and the Bank of Japan kept their policy rates constant over the intermeeting period, but the Bank of England increased the size of its planned asset purchases from £75 billion to £125 billion. The Bank of Japan continued purchasing commercial paper, corporate bonds, equities, and government bonds. Chinese authorities held the renminbi nearly unchanged against the dollar, and several central banks intervened to purchase dollars, attempting to slow the dollar's depreciation against their currencies. Staff Economic OutlookIn the forecast prepared for the June meeting, the staff revised upward its outlook for economic activity during the remainder of 2009 and for 2010. Consumer spending appeared to have stabilized since the start of the year, sales and starts of new homes were flattening out, and the recent declines in capital spending did not look as severe as those that had occurred around the turn of the year. Recent declines in payroll employment and industrial production, while still sizable, were smaller than those registered earlier in 2009. Household wealth was higher, corporate bond rates had fallen, the value of the dollar was lower, the outlook for foreign activity was better, and financial stress appeared to have eased somewhat more than had been anticipated in the staff forecast prepared for the prior FOMC meeting. The projected boost to aggregate demand from these factors more than offset the negative effects of higher oil prices and mortgage rates. The staff projected that real GDP would decline at a substantially slower rate in the second quarter than it had in the first quarter and then increase in the second half of 2009, though less rapidly than potential output. The staff also revised up its projection for the increase in real GDP in 2010, to a pace above the growth rate of potential GDP. As a consequence, the staff projected that the unemployment rate would rise further in 2009 but would edge down in 2010. Meanwhile, the staff forecast for inflation was marked up. Recent readings on core consumer prices had come in a bit higher than expected; in addition, the rise in energy prices, less-favorable import prices, and the absence of any downward movement in inflation expectations led the staff to raise its medium-term inflation outlook. Nonetheless, the low level of resource utilization was projected to result in an appreciable deceleration in core consumer prices through 2010. Looking ahead to 2011 and 2012, the staff anticipated that financial markets and institutions would continue to recuperate, monetary policy would remain stimulative, fiscal stimulus would be fading, and inflation expectations would be relatively well anchored. Under such conditions, the staff projected that real GDP would expand at a rate well above that of its potential, that the unemployment rate would decline significantly, and that overall and core personal consumption expenditures inflation would stay low. Participants' Views and Committee Policy ActionIn conjunction with this FOMC meeting, all meeting participants--the five members of the Board of Governors and the presidents of the 12 Federal Reserve Banks--provided projections for economic growth, the unemployment rate, and consumer price inflation for each year from 2009 through 2011 and over a longer horizon. Longer-run projections represent each participant's assessment of the rate to which each variable would be expected to converge over time under appropriate monetary policy and in the absence of further shocks. Participants' forecasts through 2011 and over the longer run are described in the Summary of Economic Projections, which is attached as an addendum to these minutes. In their discussion of the economic situation and outlook, participants generally agreed that the information received since the April meeting indicated that the economic contraction was slowing and that the decline in activity could cease before long. Business and household confidence had picked up some, and survey data and anecdotal reports showed improved expectations for the future. The inventory adjustment process was continuing, housing and consumption demand apparently had leveled off, and financial market strains had eased further. Nonetheless, most participants saw the economy as still quite weak and vulnerable to further adverse shocks. Conditions in the labor market remained poor, and the unemployment rate continued to rise. These factors, along with past declines in wealth, would weigh on consumer spending. Although financial market conditions had improved, credit was still quite tight in many sectors. Economic activity in foreign economies was unlikely to be sufficiently strong to provide a substantial boost to U.S. exports. Against this backdrop, participants generally judged that, while U.S. output would probably begin to grow again in the second half of the year, the rate of increase was likely to be relatively slow. Most believed that downside risks to economic growth had diminished somewhat since the April meeting, but were still significant. Developments in financial markets over the intermeeting period were seen as broadly positive, reflecting, at least in part, a reduction in the perceived risk of further severely adverse outcomes. In particular, many participants noted that the results of the SCAP helped bolster confidence in banks and led to large infusions of private capital in that sector. Corporate credit markets continued to improve, and markets for asset-backed securities also showed an increasing amount of activity, supported in part by the TALF. Increases in equity prices had favorable effects on household wealth and overall sentiment. Still, participants generally noted that the improvement in market conditions was in part due to ongoing support from various government programs and that underlying financial conditions remained fragile. Credit was tight, with some banks quite reluctant to lend. Worsening credit quality, especially for consumer and commercial real estate loans, was seen as an important reason for reduced lending and tighter terms, and banks could face substantial losses in their loan portfolios in coming quarters. Many participants noted that obtaining financing for commercial real estate projects remained extremely difficult amid worsening fundamentals in the sector. Consumer spending appeared no longer to be declining but nonetheless remained weak. The continued sluggishness in consumer expenditures mainly reflected falling employment, sharply lower wealth as a result of earlier steep declines in asset prices, and tight credit conditions. Because these factors were not seen as likely to dissipate quickly, most participants judged that consumer spending would continue to be subdued for some time. Given the significant uncertainties in the economic outlook, a sizable reduction in the saving rate seemed unlikely in the near term; some saw the possibility of further increases in the household saving rate. Participants also observed that, while personal income had expanded briskly of late, those increases had been boosted by special one-time factors such as fiscal stimulus and large cost-of-living adjustments for Social Security recipients. Personal income was likely to contract for a time going forward as the effects of these factors waned, and there was some risk that consumer spending might also decline as a consequence. Indicators of single-family starts and sales suggested that housing activity may be leveling out, but most participants viewed the sector as still vulnerable to further weakness. Some expressed concern that the increases in mortgage rates seen over the intermeeting period had the potential to further depress the demand for housing and thus impede an economic recovery. Others noted that foreclosures were continuing at a very high rate and could push house prices down further and add to inventories of unsold homes, holding back housing activity and weighing on household wealth. Labor market conditions were of particular concern to meeting participants. Although some improvements were evident in new and continuing unemployment insurance claims and the May payroll report was less weak than expected, job losses remained substantial over the intermeeting period and the unemployment rate continued to rise rapidly. Rising labor force participation contributed to the increase in the unemployment rate. Some participants pointed out that households' financial strains may be encouraging many individuals to enter the labor market despite difficult labor market conditions. Reports from district contacts suggested that workweeks were being trimmed and that total hours worked were falling significantly. The large number of people working part time for economic reasons and the prevalence of permanent job reductions rather than temporary layoffs suggested that labor market conditions were even more difficult than indicated by the unemployment rate. With the recovery projected to be rather sluggish, most participants anticipated that the employment situation was likely to be downbeat for some time. Anecdotal reports suggested that the weakness in activity was widespread across many industries and extended to the service sector. However, some meeting participants highlighted evidence from regional surveys that pointed to a stabilization or even a slight pickup in manufacturing in some areas, and positive signs were apparent in the energy and agriculture sectors. Participants noted an improvement in business sentiment in many districts, but contacts remained quite uncertain about the timing and extent of the recovery; elevated uncertainty was said to be inhibiting capital spending in many cases. Many businesses had been successful in working down inventories of unsold goods. Some participants noted that, as this process continues, increases in sales will have to be met by increases in production, which would, in turn, support growth in hours worked and eventually in investment outlays. Many participants noted that the global nature of this recession meant that growth abroad was not likely to bolster U.S. exports and so contribute to a recovery in the United States. In Europe, for example, unemployment was also rising sharply and financial strains remained significant. Some participants thought that recovery there was likely to lag behind that of the United States. In Asia, the outlook appeared more promising, with some evidence that the rate of decline in activity was diminishing. Recent information from China suggested that economic growth may be picking up there. Still, some participants mentioned that growth in that region was likely to remain importantly dependent on exports to major industrial economies that were likely to recover slowly. Although recent increases in oil and other commodity prices were likely to raise headline inflation over the near term, most participants expected core inflation to remain subdued for some time. Several measures of labor compensation had slowed in recent quarters as unemployment mounted and wages were not likely to exert any significant upward pressures on prices, given the expectation that labor market conditions were likely to deteriorate further in coming months and probably would not improve quickly thereafter. In addition, many participants noted that productivity growth had been surprisingly strong in recent quarters. Although the measured increase in productivity might reflect cyclical factors rather than changes in the underlying trend and was subject to data revisions, growth in unit labor costs was expected to continue to be restrained in coming quarters. Substantial resource slack was also likely to keep price inflation low in the future. Participants noted the considerable uncertainty surrounding estimates of the output and unemployment gaps and the extent of their effects on prices. However, most agreed that, even taking account of such uncertainty, the economy was almost certainly operating well below its potential and that significant price pressures were unlikely to materialize in the near and medium terms. Still, in light of the signs that economic activity was stabilizing, most participants saw less downside risk to their expectations for inflation. Moreover, participants pointed out that some measures of inflation expectations had edged up recently from very low readings, perhaps reflecting in part reduced concerns about deflation, and were now at levels close to those prevailing prior to the onset of the crisis. A few participants were concerned that inflation expectations could continue to rise, especially in light of the Federal Reserve's greatly expanded balance sheet and the associated large volume of reserves in the banking system, and that as a result inflation could temporarily rise above levels consistent with the Committee's dual objectives of maximum employment and stable prices. Most participants, however, expected that inflation would remain subdued for some time. In their discussion of monetary policy for the period ahead, Committee members agreed that the stance of monetary policy should not be changed at this meeting. Given the prospects for weak economic activity, substantial resource slack, and subdued inflation, the Committee agreed that it should maintain its target range for the federal funds rate at 0 to 1/4 percent. The future path of the federal funds rate would depend on the Committee's evolving expectations for the economy, but for now, members thought it most likely that the federal funds rate would need to be maintained at an exceptionally low level for an extended period, given their forecasts for only a gradual upturn in activity and the lack of inflation pressures. The Committee also agreed that changes to its program of asset purchases were not warranted at this time. Although an expansion of such purchases might provide additional support to the economy, the effects of further asset purchases, especially purchases of Treasury securities, on the economy and on inflation expectations were uncertain. Moreover, it seemed likely that economic activity was in the process of leveling out, and the considerable improvements in financial markets over recent months were likely to lend further support to aggregate demand. Accordingly, the Committee agreed that the asset purchase programs should proceed for now on the schedule announced at previous meetings. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to purchase agency debt, agency MBS, and longer-term Treasury securities during the intermeeting period with the aim of providing support to private credit markets and economic activity. The timing and pace of these purchases should depend on conditions in the markets for such securities and on a broader assessment of private credit market conditions. The Committee anticipates that the combination of outright purchases and various liquidity facilities outstanding will cause the size of the Federal Reserve's balance sheet to expand significantly in coming months. The Desk is expected to purchase up to $200 billion in housing-related agency debt by the end of this year. The Desk is expected to purchase up to $1.25 trillion of agency MBS by the end of the year. The Desk is expected to purchase up to $300 billion of longer-term Treasury securities by the end of the third quarter. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability." The vote encompassed approval of the statement below to be released at 2:15 p.m.: "Information received since the Federal Open Market Committee met in April suggests that the pace of economic contraction is slowing. Conditions in financial markets have generally improved in recent months. Household spending has shown further signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Businesses are cutting back on fixed investment and staffing but appear to be making progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability. The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time. In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted." Voting for this action: Messrs. Bernanke and Dudley, Ms. Duke, Messrs. Evans, Kohn, Lacker, Lockhart, Tarullo, and Warsh, and Ms. Yellen. Voting against this action: None. It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, August 11-12, 2009. The meeting adjourned at 12:40 p.m. on June 24, 2009. Notation VoteBy notation vote completed on May 19, 2009, the Committee unanimously approved the minutes of the FOMC meeting held on April 28-29, 2009. Conference CallOn June 3, 2009, the Committee met by conference call in a joint session with the Board of Governors to review recent economic and financial developments, including changes in the Federal Reserve's balance sheet. In addition, by unanimous vote, Brian Sack was selected to serve as Manager, System Open Market Account, on the understanding that his selection was subject to being satisfactory to the Federal Reserve Bank of New York. Secretary's note: Advice subsequently was received that the selection of Mr. Sack as Manager was satisfactory to the Board of Directors of the Federal Reserve Bank of New York. _____________________________Brian F. MadiganSecretary 1. Attended Tuesday's session only. Return to text Return to top

2009-06-24

Statement

Information received since the Federal Open Market Committee met in April suggests that the pace of economic contraction is slowing. Conditions in financial markets have generally improved in recent months. Household spending has shown further signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Businesses are cutting back on fixed investment and staffing but appear to be making progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability. The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time. In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted. Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

N/A

Minute

A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held in the offices of the Board of Governors in Washington, D.C., on Tuesday, June 23, 2009, at 1:00 p.m. and continued on Wednesday, June 24, 2009, at 9:00 a.m. PRESENT:Mr. Bernanke, ChairmanMr. Dudley, Vice ChairmanMs. DukeMr. EvansMr. KohnMr. LackerMr. LockhartMr. Tarullo Mr. WarshMs. Yellen Messrs. Bullard and Hoenig, Ms. Pianalto, and Mr. Rosengren, Alternate Members of the Federal Open Market Committee Messrs. Fisher, Plosser, and Stern, Presidents of the Federal Reserve Banks of Dallas, Philadelphia, and Minneapolis, respectively Mr. Madigan, Secretary and EconomistMs. Danker, Deputy SecretaryMr. Luecke, Assistant SecretaryMr. Skidmore, Assistant SecretaryMs. Smith, Assistant SecretaryMr. Alvarez,1 General CounselMr. Baxter, Deputy General CounselMr. Sheets, Economist Mr. Stockton, Economist Messrs. Altig, Clouse, Connors, Kamin, Slifman, Weinberg, and Wilcox, Associate Economists Mr. Sack, Manager, System Open Market Account Ms. Johnson, Secretary of the Board, Office of the Secretary, Board of Governors Mr. Frierson,1 Deputy Secretary, Office of the Secretary, Board of Governors Mr. Struckmeyer, Deputy Staff Director, Office of the Staff Director for Management, Board of Governors Mr. English, Deputy Director, Division of Monetary Affairs, Board of Governors Mr. Blanchard, Assistant to the Board, Office of Board Members, Board of Governors Messrs. Greenlee, Nelson, Reifschneider, and Wascher, Associate Directors, Divisions of Banking Supervision and Regulation, Monetary Affairs, Research and Statistics, and Research and Statistics, respectively, Board of Governors Mr. Gagnon, Visiting Associate Director, Division of Monetary Affairs, Board of Governors Mr. Oliner, Senior Adviser, Division of Research and Statistics, Board of Governors Messrs. Carpenter and Perli, Deputy Associate Directors, Division of Monetary Affairs, Board of Governors Mr. Kiley, Assistant Director, Division of Research and Statistics, Board of Governors Mr. Small, Project Manager, Division of Monetary Affairs, Board of Governors Ms. Lindner, Group Manager, Division of Research and Statistics, Board of Governors Mr. Wood, Senior Economist, Division of International Finance, Board of Governors Messrs. Driscoll, King,¹ and McCarthy, Economists, Division of Monetary Affairs, Board of Governors Ms. Beattie, Assistant to the Secretary, Office of the Secretary, Board of Governors Ms. Low, Open Market Secretariat Specialist, Division of Monetary Affairs, Board of Governors Messrs. Fuhrer and Rosenblum, Executive Vice Presidents, Federal Reserve Banks of Boston and Dallas, respectively Mr. Judd, Advisor to the President, Federal Reserve Bank of San Francisco Messrs. Feldman, Hilton, Krane, McAndrews, Mses. Mester and Mosser, and Messrs. Schweitzer, Sellon, and Waller, Senior Vice Presidents, Federal Reserve Banks of Minneapolis, New York, Chicago, New York, Philadelphia, New York, Cleveland, Kansas City, and St. Louis, respectively Ms. Logan, Vice President, Federal Reserve Bank of New York Developments in Financial Markets and the Federal Reserve's Balance SheetThe Manager of the System Open Market Account (SOMA) reported on recent developments in domestic and foreign financial markets. The Manager also reported on System open market operations in Treasury securities and in agency debt and agency mortgage-backed securities (MBS) during the period since the Committee's April 28-29 meeting. By unanimous vote, the Committee ratified those transactions. There were no open market operations in foreign currencies for the System's account over the intermeeting period. The Committee reviewed a staff proposal that would authorize the Desk to lend, as part of the Federal Reserve's regular overnight securities lending operations, securities held in the SOMA portfolio that are direct obligations of federal agencies. Lending agency securities was viewed as a technical modification to the existing overnight securities lending program that would support functioning of agency debt markets. The Committee voted unanimously to amend paragraph 3 of the Authorization for Domestic Open Market Operations with the text underlined below. "3. In order to ensure the effective conduct of open market operations, the Federal Open Market Committee authorizes the Federal Reserve Bank of New York to lend on an overnight basis U.S. Government securities and securities that are direct obligations of any agency of the United States, held in the System Open Market Account, to dealers at rates that shall be determined by competitive bidding. The Federal Reserve Bank of New York shall set a minimum lending fee consistent with the objectives of the program and apply reasonable limitations on the total amount of a specific issue that may be auctioned and on the amount of securities that each dealer may borrow. The Federal Reserve Bank of New York may reject bids which could facilitate a dealer's ability to control a single issue as determined solely by the Federal Reserve Bank of New York." The staff reported on projections of the Federal Reserve's balance sheet under various assumptions about economic and financial conditions and the associated path of monetary policy. Staff projections suggested that the size of the Federal Reserve's balance sheet might peak late this year and decline gradually thereafter. The staff also presented information on the possible implications of substantial changes in the size and composition of the Federal Reserve's balance sheet for the System's net income. The analysis indicated that the Federal Reserve was likely to earn substantial net interest income over the next few years under most interest rate scenarios. The staff presented one scenario, however, in which aggressive increases in short-term interest rates significantly reduced System net income relative to a baseline scenario. The analysis also suggested that the market value of the Federal Reserve's securities holdings could decline appreciably under some scenarios. However, while the Federal Reserve would retain the option of selling securities before they mature or are prepaid as a means of tightening policy when appropriate, it was not expected to have to do so. Changes in market valuations were thus seen as unlikely to have significant implications for the System's net income. In a related discussion, the staff briefed the Committee on a number of possible tools that the Federal Reserve might employ to foster effective control of the federal funds rate in the context of a much expanded balance sheet. Some of those tools were focused primarily on shaping or strengthening the demand for reserves, while others were designed to provide greater control over the supply of reserves. In discussing the staff presentation, meeting participants generally agreed that the Federal Reserve either already had or could develop tools to remove policy accommodation when appropriate. Ensuring that policy accommodation can ultimately be withdrawn smoothly and at the appropriate time would remain a top priority of the Federal Reserve. The staff also provided the Committee with an analysis of the potential adverse effects of very high reserve balances on bank capital ratios. An important issue was whether the further increase in reserve balances that is likely to result from the Federal Reserve's already-announced program of asset purchases could lead banks to limit their lending and acquisition of securities in order to prevent an excessive decline in their capital ratios. The analysis concluded that, with few exceptions, banks' regulatory leverage ratios (defined as tier 1 capital divided by total average assets) were likely to remain comfortably above regulatory minimums, even with the substantial growth in reserve balances projected to occur in coming months and even if there were some erosion in bank capital. In part, that result reflected the fact that many institutions had raised capital lately; in addition, the leverage ratios for most institutions were well above the regulatory minimums at the end of the first quarter. The staff also reviewed the experience to date with the Federal Reserve's purchases of Treasury securities, agency debt securities, and agency MBS. A number of potential modifications to those programs were presented for the Committee's consideration, including possible expansions in their size, extensions of the duration of securities purchased, steps to increase the flexibility of those purchases both within each program and across programs in response to short-term market developments, and possible approaches to winding down purchases as the programs near completion. The Federal Reserve was already purchasing a very large fraction of new current-coupon agency MBS and agency debt, and further increasing the scale of those programs could compromise market functioning. Some participants thought that increases in purchases of Treasury securities might have little or no effect on long-term interest rates unless the increases were very sizable, given the large amount of current and projected supply of Treasury securities. Others were concerned that announcements of substantial additional purchases could add to perceptions that the federal debt was being monetized. While most members did not see large-scale purchases of Treasury securities as likely to be a source of inflation pressures given the weak economic outlook, public concern about monetization could have adverse implications for inflation expectations. The asset purchase programs were intended to support economic activity by improving market functioning and reducing interest rates on mortgage loans and other long-term credit to households and businesses relative to what they otherwise would have been. But the Committee had not set specific objectives for longer-term interest rates, and participants did not consider it appropriate to allow the Desk discretion to adjust the size and composition of the Federal Reserve's asset purchases in response to short-run fluctuations in market interest rates. Some participants noted that, in principle, the Committee could formulate a plan for asset purchases that would respond to economic and financial developments in a way that might better promote monetary policy objectives. Most, however, thought that formulating and communicating such a plan would be very difficult, potentially leading to an increase in market uncertainty regarding Federal Reserve actions and intentions. Many participants agreed, however, that it was appropriate for the Desk to make small adjustments to the size and timing of purchases aimed at fostering market liquidity and improving market functioning. Participants discussed the merits of including securities backed by adjustable-rate mortgages in MBS purchases and of tapering off purchases of securities as the asset purchase programs were being completed, but the Committee did not reach a decision on those issues at the meeting. The staff presented policymakers with proposals for extensions, modifications, and terminations of various liquidity programs. A number of the credit and liquidity facilities that the Federal Reserve had established in the course of the financial crisis were scheduled to expire on October 30. Use of most of the liquidity facilities had declined in recent months as market conditions had improved. Still, meeting participants judged that market conditions remained fragile, and that concerns about counterparty credit risk and access to liquidity, both of which had ebbed notably in recent months, could increase again. Moreover, participants viewed the availability of the liquidity facilities as a factor that had contributed to the reduction in financial strains. If the Federal Reserve's backup liquidity facilities were terminated prematurely, such developments might put renewed pressure on some financial institutions and markets and tighten credit conditions for businesses and households. The period over year-end was seen as posing heightened risks given the usual pressures in financial markets at that time. In these circumstances, participants agreed that most facilities should be extended into early next year. However, participants also judged that improved market conditions and declining use of the facilities warranted scaling back, suspending, or tightening access to several programs, including the Term Auction Facility (TAF), the Term Securities Lending Facility (TSLF), and the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF). Following the presentation and discussion of the staff proposal, the Board voted unanimously to extend the AMLF, the Commercial Paper Funding Facility (CPFF), the Primary Dealer Credit Facility (PDCF), and the TSLF through February 1, 2010. The Board did not extend the Money Market Investor Funding Facility (MMIFF) beyond October 30. The extension of the TSLF required the approval of the Federal Open Market Committee (FOMC), as that facility was established under the joint authority of the Board and the FOMC. The Board and the FOMC jointly decided to suspend some TSLF auctions and to reduce the size and frequency of others. In addition, the FOMC extended the temporary reciprocal currency arrangements (swap lines) between the Federal Reserve and other central banks to February 1, 2010. The FOMC unanimously passed the following resolution to extend the temporary swap arrangements and the TSLF: "The Federal Open Market Committee extends until February 1, 2010, its authorizations for the Federal Reserve Bank of New York to engage in temporary reciprocal currency arrangements ("swap arrangements") with foreign central banks under the conditions previously established by the Committee. The Federal Open Market Committee extends until February 1, 2010, its authorizations for the Federal Reserve Bank of New York to provide a Term Securities Lending Facility, subject to the same collateral, interest rate, and other conditions previously established by the Committee. However, the Federal Reserve Bank of New York is directed to suspend Schedule 1 TSLF auctions, effective immediately. The Federal Reserve Bank of New York is directed to conduct Schedule 2 TSLF auctions initially on a monthly basis in amounts of $75 billion; the Reserve Bank is directed to reduce over time the amounts provided through the TSLF as market conditions warrant. The Federal Reserve Bank of New York is directed to suspend operations of the Term Securities Lending Facility Options Program (TOP), effective immediately. Should market conditions appear to warrant the resumption of Schedule 1 TSLF or TOP auctions, the Account Manager is to consult with the Chairman and, if possible, the Board and the Federal Open Market Committee." Board members and FOMC participants noted their expectation that a number of these facilities may not need to be extended beyond February 1, 2010, if the recent improvements in market conditions continue. However, if financial stresses do not moderate as expected, the Board and the FOMC were prepared to extend the terms of some or all of the facilities as needed to promote financial stability and economic growth. Staff Review of the Economic SituationThe information reviewed at the June 23-24 meeting suggested that the economy remained very weak, though declines in activity seemed to be lessening. Employment was still falling, and manufacturers had cut production further in response to excess inventories and soft demand. But the reductions in employment and industrial production had slowed somewhat, consumer spending appeared to be holding reasonably steady after shrinking in the second half of 2008, and sales and construction of single-family homes had apparently flattened out. In addition, the recent declines in capital spending were smaller than those recorded earlier in the year. Consumer price inflation was fairly quiescent in recent months, although the upturn in energy prices appeared likely to boost headline inflation in June. The demand for labor weakened further in May, albeit less rapidly than in earlier months. Nonfarm payrolls continued to shrink, but the decline was the smallest since September. In addition, average weekly hours of production and nonsupervisory workers on private payrolls, which had dropped substantially from September to March, were essentially unchanged in April and May. Thus aggregate hours worked by this group fell at a slower pace in April and May than on average over the previous seven months. The unemployment rate, however, rose further in May, to 9.4 percent. Despite the high level of joblessness, the labor force participation rate moved up for a second consecutive month to a level close to where it was at the beginning of the recession. The four-week moving average of initial claims for unemployment insurance fell back a little, but the number of individuals receiving unemployment insurance benefits continued to increase. Industrial production decreased in April and May but at a slower pace than in the first quarter. Manufacturing output also fell in those months, and the factory operating rate dipped further in May. In the high-tech sector, computer output fell at a pace similar to that in the first quarter, but near-term indicators of production turned somewhat less negative and global semiconductor sales climbed in April for the second consecutive month. The production of motor vehicles and parts dropped sharply in May, principally because of extended plant shutdowns at General Motors and Chrysler. The production of commercial aircraft moved up. Outside the transportation and high-tech sectors, most industries continued to cut production in both April and May, though at a slower pace than over the preceding five months. Real personal consumption expenditures rose somewhat in the first quarter after falling in the second half of 2008, and available data suggested that spending was holding reasonably steady in the second quarter. On the basis of the latest retail sales data, real expenditures on goods other than motor vehicles appeared to have risen slightly in May and to have changed little, on net, since the turn of the year. Sales of light motor vehicles in April and May were slightly higher than the first-quarter average. Real outlays on services were reported to have picked up some in April from the average monthly gain seen over the first three months of the year. The fundamental determinants of consumer demand appeared to have improved a bit: Despite the ongoing decline in employment, real disposable personal income rose in the first quarter and posted another sizable gain in April as various provisions of the American Recovery and Reinvestment Act of 2009 boosted transfer payments and reduced personal taxes. In addition, equity prices recorded substantial gains in April and May, reversing a small portion of the prior wealth declines. Measures of consumer sentiment, while remaining at levels typically seen during recessions, improved markedly from the historical lows recorded around the turn of the year. Single-family housing starts edged up in May, and adjusted permit issuance for single-family houses was a little above the level of starts, as it had been since January. In contrast, activity in the much smaller multifamily sector fell significantly further, reflecting a sharp deterioration in the fundamentals in that sector. The steep decline in the demand for new single-family houses seemed to have abated. However, the pace of new home sales was still very low in April, and the months' supply of new homes remained quite elevated relative to sales despite a decrease in the stock of unsold new single-family homes to a level roughly one-half of its mid-2006 peak. Sales of existing single-family homes had been fairly steady from late 2008 through May. The relative stability of the resale market over this period coincided with a heightened proportion of transactions involving bank-owned and other distressed properties. The apparent stabilization in housing demand was likely due, in part, to the improvement in housing affordability that resulted from low mortgage rates and declining house prices. Rates for conforming 30-year fixed-rate mortgages rose on net between late April and late June but remained below the levels seen over most of 2008. Although the market for private-label nonprime mortgages remained closed, spreads between rates for jumbo and standard conforming loans narrowed substantially since March. Meanwhile, national house prices continued to decline. Real investment in equipment and software (E&S) continued to contract; however, the decline in the second quarter appeared likely to be smaller than in either of the two preceding quarters. Outlays on transportation equipment seemed to be firming after shrinking for an extended period, and the incoming data on shipments and orders of nondefense capital goods pointed to a moderation in the rate of decrease in other major components of E&S. The contraction in spending on computing equipment appeared to be leveling off, although businesses continued to cut their real outlays on software. Real spending on equipment outside of high-tech and transportation seemed to have dropped less rapidly in the second quarter than in the first quarter. Data suggested a substantial increase in outlays for nonresidential construction in March and April, concentrated in energy-related sectors. Outside of the energy-related sectors, demand for nonresidential building remained extremely weak and financing difficult to obtain. Although the months' supply of nonfarm business inventories remained elevated, large production cutbacks in recent quarters allowed producers to stem the rise in stocks relative to sales. The principal determinants of investment were still weak: Business output dropped further in the first quarter, the user cost of capital was higher than it was a year earlier, and credit remained tight. However, corporate bond yields eased considerably in the weeks leading to the June meeting, and monthly surveys of business conditions and sentiment were generally less downbeat than earlier in the year. The U.S. international trade deficit widened slightly in April, as a decrease in imports was more than offset by a drop in exports. Most major categories of exports fell, with exports of machinery, industrial supplies, and consumer goods exhibiting significant declines. The value of imports of goods and services also edged down after remaining about unchanged in March. Imports of machinery and industrial supplies displayed significant decreases, and imports of services fell moderately. Imports of consumer goods increased. The value of oil imports also rose, as higher prices outweighed lower volumes. The decline in output in the advanced foreign economies deepened in the first quarter. Domestic demand fell in all major economies, led by double-digit declines in fixed investment and sizable negative contributions of inventories to growth. Recent indicators, however, suggested that the pace of contraction likely moderated in the second quarter. Purchasing managers indexes rebounded from the exceptionally low levels reached in the first quarter, and industrial production stabilized somewhat. In emerging market economies, incoming data showed that first-quarter real gross domestic product (GDP) contracted sharply in Mexico, Hong Kong, Malaysia, and Singapore, edged up in Korea, and expanded considerably in India and Indonesia. For the second quarter, indicators suggested a broader stabilization of activity in emerging market economies. In China, retail sales and fixed-asset investment rose strongly. Financial conditions continued to improve in most emerging market economies. In the United States, headline consumer prices were little changed between March and May, held down by declines in the prices of food and energy over that period. Core inflation was slightly higher from March to May than during the preceding three months, although core prices posted fairly small increases apart from a tax-induced jump in tobacco prices. Near-term inflation expectations in the Reuters/University of Michigan Surveys of Consumers remained steady in May and then rose somewhat in the preliminary June survey. Survey measures of long-term inflation expectations showed no signs of moving lower despite the considerable margin of labor- and product-market slack present in the economy. At earlier stages of processing, the producer price index for core intermediate materials continued to decline through May, albeit at a slower pace than that seen at the end of 2008. Spot commodity prices, which had moved higher over the first four months of 2009, rose more rapidly since the end of April. Nevertheless, these prices remained well below their year-earlier levels. The incoming data on labor costs were mixed. Although the rise in hourly compensation in the nonfarm business sector picked up slightly in the first quarter, the employment cost index decelerated further. Increases in average hourly earnings also slowed further in April and May. Staff Review of the Financial SituationThe decision by the FOMC at its April 28-29 meeting to leave the target range for the federal funds rate unchanged and the accompanying statement indicating that the FOMC would maintain the size of the large-scale asset purchase program were largely anticipated, but yields on Treasury securities rose slightly, as a few investors apparently had seen some chance that the Committee would expand the purchase program. The release of the April FOMC minutes three weeks later prompted a reversal of this move, as market participants reportedly focused on the suggestion that the total size of the purchase program might need to be increased at some point to spur a more rapid pace of recovery. The expected path of the federal funds rate implied by futures prices was largely unchanged by the release of the Committee's statement and minutes. However, in the days following the release of the May employment report, which was read as being significantly less negative than anticipated, market participants marked up their expected path for the federal funds rate. Yields on nominal Treasury coupon securities increased, on net, over the intermeeting period. These moves likely reflected a number of factors, including investors' perceptions of an improvement in the economic outlook, decreased concerns about the risk of deflation, a reversal of flight-to-quality flows, and selling of long-duration assets as exposure to mortgage prepayment risk dropped with a rise in mortgage rates. In addition, inflation compensation rose over the intermeeting period as yields on inflation-indexed Treasury securities increased much less than those on their nominal counterparts. Some of the rise in inflation compensation may have reflected an increase in inflation expectations, but an improvement in liquidity in the market for Treasury inflation-protected securities and mortgage-related hedging flows may have boosted inflation compensation as well. Pressures in short-term bank funding markets eased further, as evidenced by declines in London interbank offered rate (Libor) fixings and in spreads between one- and three-month Libor and comparable-maturity overnight index swap (OIS) rates. These spreads narrowed to levels not seen since early 2008, transaction volume rose modestly, and tentative signs of increased liquidity reportedly emerged. The market for repurchase agreements saw slight improvement, with bid-asked spreads for most types of transactions narrowing a bit and haircuts roughly unchanged. Spreads on A2/P2-rated commercial paper and AA-rated asset-backed commercial paper were little changed, on net, since late April, remaining at the low end of their ranges over the previous 18 months. Over the intermeeting period, functioning in the market for Treasury securities generally improved and trading picked up, but some strains remained. The on-the-run/off-the-run premium narrowed considerably at the short end of the yield curve. Such spreads, however, remained somewhat wide for longer-dated issues, apparently reflecting concerns about volatility linked to mortgage-related hedging flows. Some strains, perhaps associated with these flows, emerged at times in the MBS market; market participants reacted to the large and rapid changes in MBS yields by widening bid-asked spreads on these securities. Broad stock price indexes rose, on net, over the intermeeting period, reflecting generally better-than-expected economic news and further declines in risk premiums. The spread between an estimate of the expected real equity return over the next 10 years for S&P 500 firms and an estimate of the real 10-year Treasury yield--a rough gauge of the equity risk premium--narrowed noticeably but remained high by historical standards. Option-implied volatility on the S&P 500 index declined but remained elevated. Yields on speculative-grade and investment-grade corporate bonds dropped, and spreads over yields on comparable-maturity Treasury securities narrowed considerably. Estimates of bid-asked spreads in the secondary market for speculative-grade corporate bonds fell significantly to about their average levels in the few years before the summer of 2007, while estimates of such spreads for investment-grade corporate bonds remained somewhat elevated. Market sentiment toward the syndicated leveraged loan market also improved, with the average bid price increasing noticeably and bid-asked spreads narrowing a bit further. The inclusion of commercial mortgage-backed securities (CMBS) in the Term Asset-Backed Securities Loan Facility (TALF) program resulted initially in a narrowing of commercial mortgage credit default swap (CDS) spreads; however, spreads later widened as rating agencies issued conflicting opinions regarding the credit quality of senior CMBS tranches. Market sentiment toward the financial sector improved over the intermeeting period, reflecting, in part, the release of the Supervisory Capital Assessment Program (SCAP) results for the nation's 19 largest bank holding companies (BHCs) on May 7. Nearly all the BHCs evaluated had enough Tier 1 capital to absorb the higher losses envisioned under the hypothetical more adverse scenario; however, 10 institutions were required to enhance their capital structure to put greater emphasis on common equity. Following the announcement of the SCAP results, the 19 evaluated institutions raised, or announced plans to raise, around $70 billion in common equity through public offerings, conversion of preferred stock, and asset sales. These offerings accounted for most of the record-high total financial equity issuance in May. The evaluated BHCs have also issued additional debt under the Federal Deposit Insurance Corporation's Temporary Liquidity Guarantee Program (TLGP), as well as nonguaranteed debt. On June 9, the Treasury announced that 10 large financial institutions were eligible to repay the $68 billion in capital that they had received through the Troubled Asset Relief Program (TARP). CDS spreads for banking organizations declined considerably over the intermeeting period, although they remained well above historical norms. Stock price indexes for the banking sector and the broader financial sectors rose significantly. The level of private-sector debt was estimated to have remained about unchanged in the second quarter, as a further modest decline in household debt about offset a slight increase in nonfinancial business debt. Gross bond issuance by nonfinancial corporations was robust in May. Investment-grade issuance rebounded after a lull in April. Speculative-grade issuance was the highest since June 2007, but issuance of lower-rated speculative-grade bonds remained minimal. Meanwhile, the federal government issued large amounts of debt, and state and local government debt was estimated to have expanded moderately. The expansion of M2 slowed significantly in April and May, as the reallocation of household wealth toward the safety and liquidity of M2 assets evidently moderated. Retail money market mutual funds and small time deposits contracted in both months, probably in response to declining interest rates on these assets. The rise in currency diminished, likely reflecting primarily a waning in foreign demand. Commercial bank credit increased slightly in May following six consecutive monthly declines, but the turnaround reflected a rise in securities holdings and in the volatile "other" loans category--that is, loans other than commercial and industrial (C&I), real estate, and consumer loans. C&I loans dropped in May, amid subdued origination activity and broad-based paydowns of outstanding loans. Home equity loans edged down--the first monthly decline in this category since October 2006--partly because of banks' reductions in existing lines of credit. Closed-end residential mortgages decreased; originations were reportedly strong but were more than offset by loan sales to the government-sponsored enterprises. The amount of outstanding consumer loans originated by banks shrank during April and May; the quantity of consumer loans on banks' balance sheets decreased even more because of a number of large credit card securitizations. The dollar depreciated substantially during the intermeeting period against all other major currencies. This decline appeared to be driven by a renewed sense of optimism about global growth prospects, leading investors to shift away from safe-haven assets in the United States to riskier assets elsewhere. Libor-to-OIS spreads in euros and sterling decreased, and several foreign banks took advantage of improved financial conditions to raise capital and increase issuance of debt outside of government guarantee programs. The improved access to capital markets and better economic outlook buoyed bank stocks, which helped headline equity indexes move higher. Most stock markets in emerging market economies rose considerably, and mutual fund flows into those markets strengthened. The European Central Bank lowered its main policy rate 25 basis points to 1 percent and announced that it would purchase up to €60 billion in covered bonds. The Bank of England, the Bank of Canada, and the Bank of Japan kept their policy rates constant over the intermeeting period, but the Bank of England increased the size of its planned asset purchases from £75 billion to £125 billion. The Bank of Japan continued purchasing commercial paper, corporate bonds, equities, and government bonds. Chinese authorities held the renminbi nearly unchanged against the dollar, and several central banks intervened to purchase dollars, attempting to slow the dollar's depreciation against their currencies. Staff Economic OutlookIn the forecast prepared for the June meeting, the staff revised upward its outlook for economic activity during the remainder of 2009 and for 2010. Consumer spending appeared to have stabilized since the start of the year, sales and starts of new homes were flattening out, and the recent declines in capital spending did not look as severe as those that had occurred around the turn of the year. Recent declines in payroll employment and industrial production, while still sizable, were smaller than those registered earlier in 2009. Household wealth was higher, corporate bond rates had fallen, the value of the dollar was lower, the outlook for foreign activity was better, and financial stress appeared to have eased somewhat more than had been anticipated in the staff forecast prepared for the prior FOMC meeting. The projected boost to aggregate demand from these factors more than offset the negative effects of higher oil prices and mortgage rates. The staff projected that real GDP would decline at a substantially slower rate in the second quarter than it had in the first quarter and then increase in the second half of 2009, though less rapidly than potential output. The staff also revised up its projection for the increase in real GDP in 2010, to a pace above the growth rate of potential GDP. As a consequence, the staff projected that the unemployment rate would rise further in 2009 but would edge down in 2010. Meanwhile, the staff forecast for inflation was marked up. Recent readings on core consumer prices had come in a bit higher than expected; in addition, the rise in energy prices, less-favorable import prices, and the absence of any downward movement in inflation expectations led the staff to raise its medium-term inflation outlook. Nonetheless, the low level of resource utilization was projected to result in an appreciable deceleration in core consumer prices through 2010. Looking ahead to 2011 and 2012, the staff anticipated that financial markets and institutions would continue to recuperate, monetary policy would remain stimulative, fiscal stimulus would be fading, and inflation expectations would be relatively well anchored. Under such conditions, the staff projected that real GDP would expand at a rate well above that of its potential, that the unemployment rate would decline significantly, and that overall and core personal consumption expenditures inflation would stay low. Participants' Views and Committee Policy ActionIn conjunction with this FOMC meeting, all meeting participants--the five members of the Board of Governors and the presidents of the 12 Federal Reserve Banks--provided projections for economic growth, the unemployment rate, and consumer price inflation for each year from 2009 through 2011 and over a longer horizon. Longer-run projections represent each participant's assessment of the rate to which each variable would be expected to converge over time under appropriate monetary policy and in the absence of further shocks. Participants' forecasts through 2011 and over the longer run are described in the Summary of Economic Projections, which is attached as an addendum to these minutes. In their discussion of the economic situation and outlook, participants generally agreed that the information received since the April meeting indicated that the economic contraction was slowing and that the decline in activity could cease before long. Business and household confidence had picked up some, and survey data and anecdotal reports showed improved expectations for the future. The inventory adjustment process was continuing, housing and consumption demand apparently had leveled off, and financial market strains had eased further. Nonetheless, most participants saw the economy as still quite weak and vulnerable to further adverse shocks. Conditions in the labor market remained poor, and the unemployment rate continued to rise. These factors, along with past declines in wealth, would weigh on consumer spending. Although financial market conditions had improved, credit was still quite tight in many sectors. Economic activity in foreign economies was unlikely to be sufficiently strong to provide a substantial boost to U.S. exports. Against this backdrop, participants generally judged that, while U.S. output would probably begin to grow again in the second half of the year, the rate of increase was likely to be relatively slow. Most believed that downside risks to economic growth had diminished somewhat since the April meeting, but were still significant. Developments in financial markets over the intermeeting period were seen as broadly positive, reflecting, at least in part, a reduction in the perceived risk of further severely adverse outcomes. In particular, many participants noted that the results of the SCAP helped bolster confidence in banks and led to large infusions of private capital in that sector. Corporate credit markets continued to improve, and markets for asset-backed securities also showed an increasing amount of activity, supported in part by the TALF. Increases in equity prices had favorable effects on household wealth and overall sentiment. Still, participants generally noted that the improvement in market conditions was in part due to ongoing support from various government programs and that underlying financial conditions remained fragile. Credit was tight, with some banks quite reluctant to lend. Worsening credit quality, especially for consumer and commercial real estate loans, was seen as an important reason for reduced lending and tighter terms, and banks could face substantial losses in their loan portfolios in coming quarters. Many participants noted that obtaining financing for commercial real estate projects remained extremely difficult amid worsening fundamentals in the sector. Consumer spending appeared no longer to be declining but nonetheless remained weak. The continued sluggishness in consumer expenditures mainly reflected falling employment, sharply lower wealth as a result of earlier steep declines in asset prices, and tight credit conditions. Because these factors were not seen as likely to dissipate quickly, most participants judged that consumer spending would continue to be subdued for some time. Given the significant uncertainties in the economic outlook, a sizable reduction in the saving rate seemed unlikely in the near term; some saw the possibility of further increases in the household saving rate. Participants also observed that, while personal income had expanded briskly of late, those increases had been boosted by special one-time factors such as fiscal stimulus and large cost-of-living adjustments for Social Security recipients. Personal income was likely to contract for a time going forward as the effects of these factors waned, and there was some risk that consumer spending might also decline as a consequence. Indicators of single-family starts and sales suggested that housing activity may be leveling out, but most participants viewed the sector as still vulnerable to further weakness. Some expressed concern that the increases in mortgage rates seen over the intermeeting period had the potential to further depress the demand for housing and thus impede an economic recovery. Others noted that foreclosures were continuing at a very high rate and could push house prices down further and add to inventories of unsold homes, holding back housing activity and weighing on household wealth. Labor market conditions were of particular concern to meeting participants. Although some improvements were evident in new and continuing unemployment insurance claims and the May payroll report was less weak than expected, job losses remained substantial over the intermeeting period and the unemployment rate continued to rise rapidly. Rising labor force participation contributed to the increase in the unemployment rate. Some participants pointed out that households' financial strains may be encouraging many individuals to enter the labor market despite difficult labor market conditions. Reports from district contacts suggested that workweeks were being trimmed and that total hours worked were falling significantly. The large number of people working part time for economic reasons and the prevalence of permanent job reductions rather than temporary layoffs suggested that labor market conditions were even more difficult than indicated by the unemployment rate. With the recovery projected to be rather sluggish, most participants anticipated that the employment situation was likely to be downbeat for some time. Anecdotal reports suggested that the weakness in activity was widespread across many industries and extended to the service sector. However, some meeting participants highlighted evidence from regional surveys that pointed to a stabilization or even a slight pickup in manufacturing in some areas, and positive signs were apparent in the energy and agriculture sectors. Participants noted an improvement in business sentiment in many districts, but contacts remained quite uncertain about the timing and extent of the recovery; elevated uncertainty was said to be inhibiting capital spending in many cases. Many businesses had been successful in working down inventories of unsold goods. Some participants noted that, as this process continues, increases in sales will have to be met by increases in production, which would, in turn, support growth in hours worked and eventually in investment outlays. Many participants noted that the global nature of this recession meant that growth abroad was not likely to bolster U.S. exports and so contribute to a recovery in the United States. In Europe, for example, unemployment was also rising sharply and financial strains remained significant. Some participants thought that recovery there was likely to lag behind that of the United States. In Asia, the outlook appeared more promising, with some evidence that the rate of decline in activity was diminishing. Recent information from China suggested that economic growth may be picking up there. Still, some participants mentioned that growth in that region was likely to remain importantly dependent on exports to major industrial economies that were likely to recover slowly. Although recent increases in oil and other commodity prices were likely to raise headline inflation over the near term, most participants expected core inflation to remain subdued for some time. Several measures of labor compensation had slowed in recent quarters as unemployment mounted and wages were not likely to exert any significant upward pressures on prices, given the expectation that labor market conditions were likely to deteriorate further in coming months and probably would not improve quickly thereafter. In addition, many participants noted that productivity growth had been surprisingly strong in recent quarters. Although the measured increase in productivity might reflect cyclical factors rather than changes in the underlying trend and was subject to data revisions, growth in unit labor costs was expected to continue to be restrained in coming quarters. Substantial resource slack was also likely to keep price inflation low in the future. Participants noted the considerable uncertainty surrounding estimates of the output and unemployment gaps and the extent of their effects on prices. However, most agreed that, even taking account of such uncertainty, the economy was almost certainly operating well below its potential and that significant price pressures were unlikely to materialize in the near and medium terms. Still, in light of the signs that economic activity was stabilizing, most participants saw less downside risk to their expectations for inflation. Moreover, participants pointed out that some measures of inflation expectations had edged up recently from very low readings, perhaps reflecting in part reduced concerns about deflation, and were now at levels close to those prevailing prior to the onset of the crisis. A few participants were concerned that inflation expectations could continue to rise, especially in light of the Federal Reserve's greatly expanded balance sheet and the associated large volume of reserves in the banking system, and that as a result inflation could temporarily rise above levels consistent with the Committee's dual objectives of maximum employment and stable prices. Most participants, however, expected that inflation would remain subdued for some time. In their discussion of monetary policy for the period ahead, Committee members agreed that the stance of monetary policy should not be changed at this meeting. Given the prospects for weak economic activity, substantial resource slack, and subdued inflation, the Committee agreed that it should maintain its target range for the federal funds rate at 0 to 1/4 percent. The future path of the federal funds rate would depend on the Committee's evolving expectations for the economy, but for now, members thought it most likely that the federal funds rate would need to be maintained at an exceptionally low level for an extended period, given their forecasts for only a gradual upturn in activity and the lack of inflation pressures. The Committee also agreed that changes to its program of asset purchases were not warranted at this time. Although an expansion of such purchases might provide additional support to the economy, the effects of further asset purchases, especially purchases of Treasury securities, on the economy and on inflation expectations were uncertain. Moreover, it seemed likely that economic activity was in the process of leveling out, and the considerable improvements in financial markets over recent months were likely to lend further support to aggregate demand. Accordingly, the Committee agreed that the asset purchase programs should proceed for now on the schedule announced at previous meetings. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to purchase agency debt, agency MBS, and longer-term Treasury securities during the intermeeting period with the aim of providing support to private credit markets and economic activity. The timing and pace of these purchases should depend on conditions in the markets for such securities and on a broader assessment of private credit market conditions. The Committee anticipates that the combination of outright purchases and various liquidity facilities outstanding will cause the size of the Federal Reserve's balance sheet to expand significantly in coming months. The Desk is expected to purchase up to $200 billion in housing-related agency debt by the end of this year. The Desk is expected to purchase up to $1.25 trillion of agency MBS by the end of the year. The Desk is expected to purchase up to $300 billion of longer-term Treasury securities by the end of the third quarter. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability." The vote encompassed approval of the statement below to be released at 2:15 p.m.: "Information received since the Federal Open Market Committee met in April suggests that the pace of economic contraction is slowing. Conditions in financial markets have generally improved in recent months. Household spending has shown further signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Businesses are cutting back on fixed investment and staffing but appear to be making progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability. The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time. In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted." Voting for this action: Messrs. Bernanke and Dudley, Ms. Duke, Messrs. Evans, Kohn, Lacker, Lockhart, Tarullo, and Warsh, and Ms. Yellen. Voting against this action: None. It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, August 11-12, 2009. The meeting adjourned at 12:40 p.m. on June 24, 2009. Notation VoteBy notation vote completed on May 19, 2009, the Committee unanimously approved the minutes of the FOMC meeting held on April 28-29, 2009. Conference CallOn June 3, 2009, the Committee met by conference call in a joint session with the Board of Governors to review recent economic and financial developments, including changes in the Federal Reserve's balance sheet. In addition, by unanimous vote, Brian Sack was selected to serve as Manager, System Open Market Account, on the understanding that his selection was subject to being satisfactory to the Federal Reserve Bank of New York. Secretary's note: Advice subsequently was received that the selection of Mr. Sack as Manager was satisfactory to the Board of Directors of the Federal Reserve Bank of New York. _____________________________Brian F. MadiganSecretary 1. Attended Tuesday's session only. Return to text Return to top

2009-05-20

Minute

A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held in the offices of the Board of Governors in Washington, D.C., on Tuesday, April 28, 2009, at 2:00 p.m. and continued on Wednesday, April 29, 2009, at 9:00 a.m. PRESENT: Mr. Bernanke, ChairmanMr. Dudley, Vice ChairmanMs. DukeMr. EvansMr. KohnMr. LackerMr. LockhartMr. Tarullo Mr. WarshMs. Yellen Mr. Bullard, Ms. Cumming, Mr. Hoenig, Ms. Pianalto, and Mr. Rosengren, Alternate Members of the Federal Open Market Committee Messrs. Fisher, Plosser, and Stern, Presidents of the Federal Reserve Banks of Dallas, Philadelphia, and Minneapolis, respectively Mr. Madigan, Secretary and EconomistMs. Danker, Deputy SecretaryMr. Luecke, Assistant SecretaryMr. Skidmore, Assistant SecretaryMs. Smith, Assistant SecretaryMr. Alvarez, General CounselMr. Sheets, Economist Mr. Stockton, Economist Messrs. Altig, Clouse, Connors, Kamin, Slifman, Sullivan, Wilcox, and Williams, Associate Economists Ms. Mosser, Temporary Manager, System Open Market Account Ms. Johnson, Secretary of the Board, Office of the Secretary, Board of Governors Mr. Frierson,1 Deputy Secretary, Office of the Secretary, Board of GovernorsMr. Struckmeyer, Deputy Staff Director, Office of the Staff Director for Management, Board of Governors Ms. Barger and Mr. English, Deputy Directors, Divisions of Banking Supervision and Regulation and Monetary Affairs, respectively, Board of Governors Mr. Blanchard, Assistant to the Board, Office of Board Members, Board of Governors Messrs. Levin, Nelson, Reifschneider, and Wascher, Associate Directors, Divisions of Monetary Affairs, Monetary Affairs, Research and Statistics, and Research and Statistics, respectively, Board of Governors Mr. Meyer, Senior Adviser, Division of Monetary Affairs, Board of Governors Mr. Carpenter, Deputy Associate Director, Division of Monetary Affairs, Board of Governors Mr. Palumbo, Assistant Director, Division of Research and Statistics, Board of Governors Mr. Small, Project Manager, Division of Monetary Affairs, Board of Governors Ms. Judson and Mr. Nichols,2 Economists, Divisions of Monetary Affairs and Research and Statistics, respectively, Board of Governors Ms. Beattie, Assistant to the Secretary, Office of the Secretary, Board of Governors Ms. Low, Open Market Secretariat Specialist, Division of Monetary Affairs, Board of Governors Mr. Barron, First Vice President, Federal Reserve Bank of Atlanta Messrs. Rosenblum and Sniderman, Executive Vice Presidents, Federal Reserve Banks of Dallas and Cleveland, respectively Mr. Hakkio, Ms. Mester, and Messrs. Rasche and Rolnick, Senior Vice Presidents, Federal Reserve Banks of Kansas City, Philadelphia, St. Louis, and Minneapolis, respectively Messrs. Burke, Hornstein, and Olivei, Vice Presidents, Federal Reserve Banks of New York, Richmond, and Boston, respectively Mr. Rich, Assistant Vice President, Federal Reserve Bank of New York Developments in Financial Markets and the Federal Reserve's Balance SheetThe Manager of the System Open Market Account reported on recent developments in domestic and foreign financial markets. The Manager also reported on System open market operations in Treasury securities and in agency debt and agency mortgage-backed securities (MBS) during the period since the Committee's March 17-18 meeting. By unanimous vote, the Committee ratified those transactions. There were no open market operations in foreign currencies for the System's account over the intermeeting period. The staff reported on recent developments in System liquidity programs and on changes in the System's balance sheet. As of April 22, the System's total assets and liabilities were close to $2.2 trillion, about $130 billion higher than just before the March meeting. System holdings of agency debt and agency MBS expanded by $215 billion over the same period. Credit extended through the Federal Reserve's liquidity facilities decreased, owing, at least in part, to the recent improvement in short-term funding markets. The staff also provided the Committee with projections that were intended to illustrate the potential evolution of the Federal Reserve's balance sheet over coming years under a variety of assumptions about the economic and financial outlook and the associated path of monetary policy. The general contours of the projections--a rapid near-term increase in Federal Reserve assets and the monetary base, followed by a decline for a time--were the same in each case, but the timing and magnitude varied significantly depending upon the underlying assumptions. Moreover, many aspects of the economic and financial outlook were subject to substantial risks, implying considerable uncertainty regarding those assumptions and the resulting projections of the balance sheet and the monetary base. The staff briefed the Committee on recent developments related to the Term Asset-Backed Securities Loan Facility (TALF), which was authorized by the Board of Governors last November under section 13(3) of the Federal Reserve Act. Under the TALF, the Federal Reserve Bank of New York extended three-year loans secured by AAA-rated asset-backed securities (ABS); these securities were backed by new and recently originated loans made by financial institutions. The first two monthly subscriptions of the TALF settled during the intermeeting period. At this meeting, the Committee discussed the potential benefits of accepting newly issued, AAA-rated commercial mortgage-backed securities and insurance premium finance ABS as eligible collateral for TALF loans. Meeting participants also discussed the possibility that some new TALF loans would have a longer maturity of five years. Secretary's note: The Board of Governors subsequently approved the broadening of the list of TALF-eligible collateral and the addition of five-year loans to the facility, as announced on May 1, 2009. By unanimous vote, the Committee decided to extend the reciprocal currency ("swap") arrangements with the Bank of Canada and the Banco de Mexico for an additional year, beginning in mid-December 2009; these arrangements are associated with the Federal Reserve's participation in the North American Framework Agreement of 1994. The arrangement with the Bank of Canada is in the amount of $2 billion equivalent, and that with the Banco de Mexico is in the amount of $3 billion equivalent. The vote to renew the System's participation in these swap arrangements was taken at this meeting because of the provision in the arrangements that requires each party to provide six months' prior notice of an intention to terminate its participation. Staff Review of the Economic SituationThe information reviewed at the April 28-29 meeting indicated that the pace of decline in some components of final demand appeared to have slowed recently. Consumer spending firmed in the first quarter after dropping markedly during the second half of 2008. Housing activity remained depressed but seemed to have leveled off in February and March. In contrast, businesses cut production and employment substantially in recent months--likely reflecting, in part, inventory overhangs that persisted into the early part of the year--and fixed investment continued to contract. Headline and core consumer prices rose at a moderate pace over the first three months of the year. Labor market conditions deteriorated further in March. Private nonfarm payroll employment registered its fifth consecutive large monthly decrease, with losses widespread across industries. Moreover, the average workweek of production and nonsupervisory workers on private payrolls ticked down in March from the low level recorded in January and February, and total hours worked for this group stayed below the fourth-quarter average. The civilian unemployment rate climbed to 8.5 percent, and the labor force participation rate edged down from its February level. The four-week moving average of initial claims for unemployment insurance remained elevated in April, and the number of individuals receiving unemployment benefits relative to the size of the labor force reached its highest level since 1982. Industrial production fell substantially in March and for the first quarter as a whole, with cutbacks widespread across sectors, and manufacturing capacity utilization decreased to a very low level. First-quarter domestic production of light motor vehicles reached the lowest level in more than three decades as inventories of such vehicles, while low, remained high relative to sales. The output of high-technology products decreased in March and in the first quarter overall, with production of computers and semiconductors extending the downward trend that had begun in the second half of 2008. In contrast, the production of communications equipment edged up in the first quarter. The output of other consumer durables and business equipment stayed low, and broad indicators of near-term manufacturing activity suggested that factory output would contract over the next few months. The available data suggested that real consumer spending rose moderately in the first quarter after having fallen in the second half of last year. Real spending on goods and services excluding motor vehicles fell in March but was up, on balance, for the first quarter as a whole. Real outlays on new and used motor vehicles expanded in the first quarter following six consecutive quarterly declines. Despite the upturn in consumer spending, the fundamentals for this sector remained weak: Wages and salaries dropped, house prices were markedly lower than a year ago, and, despite recent increases, equity prices were down substantially from their levels of 12 months earlier. As measured by the Reuters/University of Michigan survey, consumer sentiment strengthened a bit in early April, as households expressed somewhat more optimism about long-term economic conditions; however, even with this improvement, the measure was only slightly above the historical low for the series recorded last November. The latest readings from the housing market suggested that the contraction in housing activity might have moderated over the first quarter. Single-family housing starts flattened out in February and March, and, after adjusting for activity outside of permit-issuing areas, the level of permits in March remained above the level of starts. The contraction in the multifamily sector also showed signs of slowing, as the drop in starts in the first quarter was well below the pace experienced during the fourth quarter of 2008. Recent data also indicated that housing demand might have stabilized. Sales of new single-family homes held steady in March after edging up in February, but the level of such sales remained low, leaving the supply of new homes relative to the pace of sales very high by historical standards. Existing home sales in March were slightly below the average pace for January and February. Most national indexes of house prices stayed on a downward trajectory. Lower mortgage rates and house prices contributed to an increase in housing affordability. Rates for conforming 30-year fixed-rate mortgages extended the significant decline that began late last year. Rates on jumbo loans came down as well, although the spread between the rates on jumbo and conforming loans was still wide and the market for private-label nonprime MBS remained impaired. Real spending on equipment and software dropped markedly in the first quarter, with declines about as steep and widespread as in the fourth quarter of 2008. Orders and shipments of nondefense capital goods excluding aircraft fell in March, turning negative again after having been flat in February. The fundamental determinants of equipment and software investment stayed weak in the first quarter: Business output continued to drop sharply, and credit availability was still tight. In the April Senior Loan Officer Opinion Survey on Bank Lending Practices, the net percentages of respondents that reported they tightened their business lending policies over the previous three months, although continuing to be very elevated, edged down for the second consecutive survey. Real spending on nonresidential structures contracted in the first quarter. Despite the significant cuts in production in recent quarters, inventories remained sizable early in the year, although the overhang appeared to be less severe than in late 2008. Given the elevated level of inventories, firms continued their efforts to reduce their stocks. The U.S. international trade deficit diminished in February to its lowest level since November 1999, as imports fell and exports rose a bit. Most major categories of exports increased, especially sales of consumer goods, and within that category, pharmaceuticals. Exports of capital goods rose despite a modest decrease in exports of aircraft, and exports of automotive products increased following a marked drop in January; in contrast, exports of services declined in February. All major categories of imports decreased. The fall in oil imports was driven by lower volumes as prices moved up slightly; prices of non-oil imports moved down, but falling volumes accounted for most of the decline in this category. Economic conditions again worsened in the advanced foreign economies in the first quarter. Industrial production continued to drop through February, employment declined substantially, and retail sales were weak. However, indicators of developments late in the first quarter, particularly the purchasing managers indexes for all of the major advanced economies, increased, suggesting some moderation in the pace of contraction of economic activity going forward. The first-quarter data also offered a few tentative signs that the deceleration of economic activity in emerging markets might have started to abate. In particular, the growth of real gross domestic product (GDP) in China appeared to pick up on a quarterly basis following fiscal stimulus measures and steps to foster credit expansion. In the United States, overall consumer prices increased over the first three months of 2009 after falling in the fourth quarter of 2008: Energy prices rebounded somewhat after their substantial late-year drop, and core prices picked up. In contrast, the producer price index for core intermediate materials fell, though at a noticeably slower pace than in late 2008. Indexes of commodity prices rose in March but stayed far below their year-earlier values. Near term inflation expectations increased in early April but did not appear to influence longer-term expectations, whose levels in April were still at the low end of the range seen over the past few years. Hourly earnings of production and nonsupervisory workers edged up in March. Staff Review of the Financial SituationThe decision by the Federal Open Market Committee (FOMC) at the March meeting to leave the target range for the federal funds rate unchanged was widely anticipated and had little effect on short-term money markets. However, investors were apparently surprised by the Committee's announcement that it would increase significantly further the size of the Federal Reserve's balance sheet by purchasing up to $300 billion in Treasury securities and expanding purchases of agency MBS and agency debt. In addition, market participants reportedly interpreted the statement that the federal funds rate was likely to remain exceptionally low "for an extended period" as stronger than the phrase "for some time" in the previous statement. Rates on Eurodollar futures contracts and yields on Treasury and agency securities fell considerably in response to the statement. The initial drop in the expected path for the federal funds rate was reversed over subsequent weeks, however, likely in response to the somewhat better economic outlook. Similarly, a portion of the substantial declines in yields on nominal Treasury coupon securities that followed the FOMC announcement was subsequently unwound amid the improved economic outlook, an easing of concern about financial institutions, and perhaps some reversal of flight-to-quality flows. Yields on inflation-indexed Treasury securities fell a bit more than those on their nominal counterparts, which decreased modestly, on net, over the period. As a result, inflation compensation rose at shorter horizons but changed little at longer horizons. Poor liquidity in the market for Treasury inflation-protected securities continued to make these readings difficult to interpret. Conditions in short-term funding markets improved somewhat over the intermeeting period. In unsecured bank funding markets, spreads of dollar London interbank offered rates (Libor) over comparable-maturity overnight index swap (OIS) rates edged down, although Libor fixings beyond the one-month maturity stayed elevated. Spreads on A2/P2-rated commercial paper and AA-rated asset backed commercial paper narrowed a bit, on net, staying at the low end of their respective ranges over the past year. Functioning in the repurchase agreement (repo) market showed additional improvement, as bid-asked spreads and "haircuts" on most collateral either narrowed or held steady, although repo volumes were still low. Consistent with modestly better conditions in the term repo market, all seven auctions under the Term Securities Lending Facility were undersubscribed over the intermeeting period, including two auctions that garnered no bids. Trading conditions in the secondary market for nominal Treasury securities also showed some signs of improvement. Premiums paid for on-the-run Treasury securities fell, and average bid asked spreads for Treasury notes were relatively stable near their pre-crisis levels. Still, daily trading volumes for Treasury securities remained low. Broad stock price indexes rose significantly, reportedly buoyed by announcements of policy measures to enhance credit markets and clean up banks' balance sheets and perhaps by some reduction in concerns about the economic outlook. Financial stocks outperformed broader markets, boosted by relatively favorable first-quarter earnings reports from a few major firms. The spread between the forward trend earnings-price ratio for S&P 500 firms and an estimate of the real long-run Treasury yield--a rough gauge of the equity risk premium--narrowed during the intermeeting period but was still very high by historical standards. Option-implied volatility on the S&P 500 index decreased but stayed well above historical norms. On net, yields on lower-rated investment-grade and speculative-grade corporate bonds dropped, resulting in a narrowing of spreads in yields on such bonds over those on comparable-maturity Treasury securities. Even so, corporate bond spreads remained extremely high by historical standards. Indicators of functioning in the corporate bond market--such as bid-asked spreads estimated by the staff--suggested that conditions in the speculative-grade segment of the market had become less strained since last autumn. Corresponding measures for investment-grade bonds hovered at moderately elevated levels. The leveraged loan market showed some improvement over the past few months, with the average bid-asked spread narrowing and the average bid price moving up from a very depressed level. The basis between an index of credit default swap spreads and measures of investment-grade corporate spreads--a rough proxy for unexploited arbitrage opportunities in the corporate credit market--stayed at high levels, reportedly reflecting an ongoing lack of financing capacity at major financial institutions. No issuance of commercial MBS occurred over the intermeeting period. The debt of the domestic private nonfinancial sector appeared to have contracted in the first quarter at about the same pace as in the fourth quarter of 2008. Activity in the mortgage market reflected mainly refinancing, and staff estimates indicated that residential mortgage debt contracted again in the first quarter, depressed by the very low pace of home sales, falling house prices, and write-downs of nonperforming loans. Consumer credit was essentially flat in January and February. Expansion of nonfinancial business debt was tepid, as robust bond issuance was partly offset by declines in commercial paper and bank loans. Federal debt rose briskly in the first quarter. M2 expanded rapidly in March. A strong increase in liquid deposits, the largest component of M2, likely reflected further reallocations by households toward safer assets. Retail money market mutual funds and small time deposits contracted modestly. Currency growth was apparently bolstered by elevated foreign demand. Commercial bank credit contracted in March and was estimated to have dropped again in April. The decline in bank credit in March was due importantly to a decrease in loans to businesses that reflected, in part, paydowns with the proceeds of bond issuance. Commercial real estate loans also fell. Bank lending to households was weak, although credit extended under revolving home equity lines of credit again expanded robustly. Residential mortgage loans on banks' books fell, on balance, in March and the first part of April; banks reportedly sold a considerable amount of single-family mortgages to the government-sponsored enterprises. Consumer loans held by banks also shrank, amid heavy securitization. The Senior Loan Officer Opinion Survey conducted in April indicated that banks continued to tighten their credit standards and terms on all major loan categories over the previous three months. Stock markets around the world rose substantially over the intermeeting period amid somewhat better sentiment regarding economic prospects, reports of better-than-expected performance from some financial firms in the United States and Europe, and continued support from monetary policies. Pressures in bank funding markets seemed to ease over the period: Spreads between both euro and sterling Libor and their respective OIS rates narrowed significantly, and financial conditions in most emerging market economies improved. The dollar depreciated against the other major currencies in an environment of seemingly increased investor appetite for risk. During the intermeeting period, foreign authorities took additional steps to address the weaknesses in their economies and financial systems. The European Central Bank and the Bank of Canada, along with several other central banks in both the advanced and emerging market economies, cut policy rates, while the Bank of England and the Bank of Japan continued their asset purchases to provide further monetary stimulus. Several governments, including Japan and Taiwan, announced new fiscal stimulus packages, and a number of European countries took additional measures to support their banking sectors. Staff Economic OutlookIn the forecast for the meeting, which was prepared prior to the release of the advance estimates of the first-quarter national income and product accounts, the staff revised up its outlook for economic activity in response to recent favorable financial developments as well as better-than-expected readings on final sales. Consumer purchases appeared to have stabilized after falling in the second half of 2008, and the steep decline in the housing sector seemed to be abating. However, the contraction in the labor market persisted into March, industrial production again fell rapidly, and the broad-based decline in equipment and software investment continued. Conditions in financial markets improved more than had been expected: Private borrowing rates moved lower, stock prices rose substantially, and some measures of financial stress eased. The staff's projections for economic activity in the second half of 2009 and in 2010 were revised up, with real GDP expected to edge higher in the second half and then increase moderately next year. The key factors expected to drive the acceleration in activity were the boost to spending from fiscal stimulus, the bottoming out of the housing market, a turn in the inventory cycle from liquidation to modest accumulation, and ongoing gradual recovery of financial markets. The staff again expected that the unemployment rate would rise through the beginning of 2010 before edging down over the rest of that year. The staff forecast for overall and core personal consumption expenditures (PCE) inflation over the next two years was revised up slightly. The staff raised its near-term estimate of core PCE inflation because recent data on core and overall PCE price inflation came in a bit higher than anticipated. Beyond the near term, however, the staff anticipated that the low level of resource utilization and a gradual decline in inflation expectations would lead to a deceleration in core PCE prices. Looking out to 2011, the staff anticipated that financial markets and institutions would continue to recuperate, monetary policy would remain stimulative, fiscal stimulus would be fading, and inflation expectations would be relatively well anchored. Under such conditions, the staff projected that real GDP would expand at a rate well above that of its potential, that the unemployment rate would decline significantly, and that overall and core PCE inflation would stay in a low range. Participants' Views and Committee Policy ActionIn conjunction with this FOMC meeting, all meeting participants--the five members of the Board of Governors and the presidents of the 12 Federal Reserve Banks--provided projections for economic growth, the unemployment rate, and consumer price inflation for each year from 2009 through 2011 and over a longer horizon. Longer-run projections represent each participant's assessment of the rate to which each variable would be expected to converge over time under appropriate monetary policy and in the absence of further shocks. Participants' forecasts through 2011 and over the longer run are described in the Summary of Economic Projections, which is attached as an addendum to these minutes. In their discussion of the economic situation and outlook, participants agreed that the information received since the March meeting provided some tentative evidence that the pace of contraction in real economic activity was starting to diminish. Participants noted that financial market conditions had generally strengthened, and surveys and anecdotal reports pointed to a pickup in household and business confidence, which nonetheless remained at very low levels. Some signs pointing toward economic stabilization were seen in data on consumer spending, housing, and factory orders. Although economic activity was being damped by the efforts of businesses to pare excess inventories, the substantial drawdown in inventories over recent months was viewed as raising the prospects for a gradual expansion in industrial production later this year. Participants anticipated that the acceleration in final demand and economic activity over the next few quarters would be modest. Growth of consumption expenditures was likely to be restrained by the weakness in labor markets and the lagged effects of past reductions in household wealth. Business investment spending would probably shrink further. Adverse global economic and financial conditions would continue to weigh on the demand for U.S. exports. Financial market developments over the intermeeting period were mainly seen as positive. Equity prices increased, money markets were functioning better, and corporate issuance of bonds and convertible securities was relatively brisk. Measures of volatility and financial stress moved down and risk spreads narrowed in many markets, perhaps partly because of investors' perceptions of diminished downside tail risks. Even so, risk spreads remained unusually wide and markets continued to be fragile. Despite the improvement in financial markets, credit conditions stayed quite restrictive for many households and businesses. The April Senior Loan Officer Opinion Survey showed that a large net fraction of banks had tightened their terms and standards for credit during the previous three months, albeit a modestly smaller fraction than indicated by the January survey. Moreover, meeting participants noted that the volume of credit extended to households and businesses was still contracting as a result of shrinking demand, declining credit quality, capital constraints on financial institutions, and the limited availability of financing through securitization markets. Consumer spending firmed somewhat during the first quarter despite the rising unemployment rate and significant financial strains. Participants generally expected that household demand would gradually strengthen over coming quarters in response to the rise in household wealth from the substantial increase in equity prices that had occurred over the intermeeting period as well as the support for income provided by fiscal policy. Nevertheless, participants judged that the recovery in consumer demand over the next few quarters would be slow, reflecting adverse labor market conditions and continuing adjustments to earlier reductions in household wealth. Some participants referred to the possibility that activity in the housing market might finally be approaching a trough. Indicators of new home sales appeared to be stabilizing, and inventories of unsold homes diminished somewhat. Participants also reported some signs that the decline in home prices might be slowing. Labor market conditions were still deteriorating. Unemployment claims were exceptionally elevated, and the ratio of permanent job cuts to temporary layoffs was substantially higher than in previous economic downturns. Staff reductions were under way even at traditionally stable employers such as hospitals and nonprofit institutions. An unusually large proportion of employed persons indicated that they were engaged in part-time work because they could not obtain full-time jobs. Participants cited the magnitude of the retrenchment in production and capital spending, but they also noted that manufacturing surveys and informal contacts suggested a noticeable upturn in business sentiment: A number of participants highlighted regional surveys reporting that greater numbers of industrial firms anticipated that their orders and shipments would start expanding over the next six months. Some participants expected that a gradual strengthening of retail sales would lead to an abatement of the decline in capital investment and would tend to induce manufacturers to begin rebuilding depleted stocks of inventories later this year, thereby reinforcing the pickup in industrial production. The outlook in some other sectors seemed less propitious; for example, one participant described survey data indicating that firms in the service sector were expecting sales to decrease further in coming months, and others referred to cutbacks in drilling and mining. The economies of many key trading partners were seen as experiencing quite severe contractions. Participants noted that banking institutions in a number of countries remained exposed to substantial further losses, and the process of repairing the balance sheets of such institutions would likely continue to restrain growth in those economies over coming quarters and hence damp the outlook for U.S. export demand. A few countries did show some signs that weakness was abating, perhaps reflecting, in part, rapid implementation of fiscal stimulus; furthermore, the recent firming of commodity prices gave an indication that global weakness might be starting to subside. Although the near-term economic outlook had improved modestly since March, participants emphasized the tentative nature of the incoming data, which are volatile and subject to revision. The experience of previous recessions underscored the challenges of identifying the onset of economic recovery using real-time indicators. Also, empirical analysis of past episodes in the United States and abroad in which economic downturns had been triggered by financial crises generally concluded that such contractions tended to be more severe and protracted than other recessions. Moreover, participants continued to see significant downside risks to the economic outlook. In particular, while financial strains and risk spreads had lessened somewhat over the intermeeting period, participants agreed that the global financial system remained vulnerable to further shocks. In discussing the Supervisory Capital Assessment Program, which was being conducted jointly by the Federal Reserve and other bank supervisory authorities, a number of participants noted that investors were concerned that the upcoming publication of stress test results might trigger volatility in financial markets. Some participants also referred to mounting losses in commercial real estate, which could have substantial adverse consequences for regional banks and other financial institutions with significant concentrations of such assets. Looking further ahead, participants considered a number of factors that would be likely to restrain the pace of economic recovery over the medium term. Strains in credit markets were expected to recede only gradually as financial institutions continued to rebuild their capital and remained cautious in their approach to asset-liability management, especially given that the outlook for credit performance was likely to improve slowly. Some sectors--such as financial services and residential construction--might well account for a smaller share of the economy in coming years, and the resulting reallocation of labor across sectors could weigh on labor markets for some time. Households would likely remain cautious, and their desired saving rates would be relatively high over the extended period that would be required to bring their stock of wealth back up to more normal levels relative to income. The stimulus from fiscal policy was expected to diminish over time as the government budget moved to a sustainable path. Demand for U.S. exports would also take time to revive, reflecting the gradual recovery of major trading partners. Most participants expected inflation to remain subdued over the next few years, and they saw some risk that elevated unemployment and low capacity utilization could cause inflation to remain persistently below the rates that they judged as most consistent with sustainable economic growth and price stability. Nonetheless, recent monthly readings on consumer price inflation had been above the low rates observed late last year, and survey measures of longer-run inflation expectations had remained reasonably stable, leading many participants to judge that the risk of a protracted period of deflation had diminished. Some participants highlighted the potential pitfalls of making inflation projections based on contemporaneously available measures of resource slack, especially during periods when the economy was facing large supply shocks and significant sectoral reallocation. Several participants referred to contacts who had expressed concerns that the expansion of the Federal Reserve's balance sheet might not be reversed in a sufficiently timely manner and hence that inflation could rise above rates consistent with price stability. In their discussion of monetary policy for the intermeeting period, Committee members agreed that the Federal Reserve's large-scale securities purchases were providing financial stimulus that would contribute to the gradual resumption of sustainable economic growth in a context of price stability. Members also agreed that it would be appropriate to continue making purchases in accordance with the amounts that had previously been announced--that is, up to $1.25 trillion of agency MBS and up to $200 billion of agency debt by the end of this year, and up to $300 billion of Treasury securities by autumn. Some members noted that a further increase in the total amount of purchases might well be warranted at some point to spur a more rapid pace of recovery; all members concurred with waiting to see how the economy and financial conditions respond to the policy actions already in train before deciding whether to adjust the size or timing of asset purchases. The Committee reaffirmed the need to monitor carefully the size and composition of the Federal Reserve's balance sheet in light of economic and financial developments. The Committee also discussed its strategy for communicating the anticipated path of its asset purchases and the circumstances under which adjustments to that path would be appropriate. All members agreed that the statement should note that the timing and overall amounts of the Committee's asset purchases would continue to be evaluated in light of the evolving economic outlook and conditions in financial markets. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to purchase agency debt, agency MBS, and longer-term Treasury securities during the intermeeting period with the aim of providing support to private credit markets and economic activity. The timing and pace of these purchases should depend on conditions in the markets for such securities and on a broader assessment of private credit market conditions. The Committee anticipates that the combination of outright purchases and various liquidity facilities outstanding will cause the size of the Federal Reserve's balance sheet to expand significantly in coming months. The Desk is expected to purchase up to $200 billion in housing-related agency debt by the end of this year. The Desk is expected to purchase at least $500 billion in agency MBS by the end of the second quarter of this year and is expected to purchase up to $1.25 trillion of these securities by the end of this year. The Desk is expected to purchase up to $300 billion of longer-term Treasury securities by the end of the third quarter. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability." The vote encompassed approval of the statement below to be released at 2:15 p.m.: "Information received since the Federal Open Market Committee met in March indicates that the economy has continued to contract, though the pace of contraction appears to be somewhat slower. Household spending has shown signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Weak sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories, fixed investment, and staffing. Although the economic outlook has improved modestly since the March meeting, partly reflecting some easing of financial market conditions, economic activity is likely to remain weak for a time. Nonetheless, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability. In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term. In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is facilitating the extension of credit to households and businesses and supporting the functioning of financial markets through a range of liquidity programs. The Committee will continue to carefully monitor the size and composition of the Federal Reserve's balance sheet in light of financial and economic developments." Voting for this action: Messrs. Bernanke and Dudley, Ms. Duke, Messrs. Evans, Kohn, Lacker, Lockhart, Tarullo, and Warsh, and Ms. Yellen. Voting against this action: None. Governor Kohn reported to the Committee on the progress of a Federal Reserve workgroup in its review of the information provided to the public regarding Federal Reserve programs and activities. That review was being conducted to identify opportunities for providing additional information to the public without compromising the Federal Reserve's mandated policy objectives. The workgroup had been devoting particular attention to approaches to enhancing the transparency of the Federal Reserve's liquidity and credit facilities, including regular reporting on the number, types, and concentration of borrowers from each program; the amount and nature of collateral accepted; detailed background information on special purpose vehicles; and contracts with private-sector firms that had been engaged to help carry out some of these programs. In the Committee's discussion of these issues, it was noted that disclosing the identities of individual borrowers would very likely discourage use of the Federal Reserve's liquidity and credit facilities because prospective borrowers would be concerned that their creditors and counterparties would see borrowing from the Federal Reserve as a sign of financial weakness. The resulting stigma would undermine the effectiveness of those programs in promoting financial stability and economic recovery. It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, June 23-24, 2009. The meeting adjourned at 11:50 a.m. on April 29, 2009. Notation VoteBy notation vote completed on April 7, 2009, the Committee unanimously approved the minutes of the FOMC meeting held on March 17-18, 2009. _____________________________ Brian F. MadiganSecretary 1. Attended Wednesday's session only. Return to text2. Attended Tuesday's session only. Return to text Return to top

2009-04-29

Statement

Information received since the Federal Open Market Committee met in March indicates that the economy has continued to contract, though the pace of contraction appears to be somewhat slower. Household spending has shown signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Weak sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories, fixed investment, and staffing. Although the economic outlook has improved modestly since the March meeting, partly reflecting some easing of financial market conditions, economic activity is likely to remain weak for a time. Nonetheless, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability. In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term. In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is facilitating the extension of credit to households and businesses and supporting the functioning of financial markets through a range of liquidity programs. The Committee will continue to carefully monitor the size and composition of the Federal Reserve's balance sheet in light of financial and economic developments. Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

2009-04-08

Minute

A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, March 17, 2009, at 2:00 p.m. and continued on Wednesday, March 18, 2009, at 9:00 a.m. PRESENT: Mr. Bernanke, ChairmanMr. Dudley, Vice ChairmanMs. DukeMr. EvansMr. KohnMr. LackerMr. LockhartMr. Tarullo Mr. WarshMs. Yellen Mr. Bullard, Ms. Cumming, Mr. Hoenig, Ms. Pianalto, and Mr. Rosengren, Alternate Members of the Federal Open Market Committee Messrs. Fisher, Plosser, and Stern, Presidents of the Federal Reserve Banks of Dallas, Philadelphia, and Minneapolis, respectively Mr. Madigan, Secretary and EconomistMs. Danker, Deputy SecretaryMr. Luecke, Assistant SecretaryMr. Skidmore, Assistant SecretaryMs. Smith, Assistant SecretaryMr. Alvarez, General CounselMr. Baxter, Deputy General CounselMr. Sheets, Economist Mr. Stockton, Economist Messrs. Altig, Clouse, Connors, Kamin, Slifman, Sullivan, Weinberg, Wilcox, and Williams, Associate Economists Ms. Mosser, Temporary Manager, System Open Market Account Ms. Johnson, Secretary of the Board, Office of the Secretary, Board of Governors Mr. Frierson, Deputy Secretary, Office of the Secretary, Board of Governors Mr. Struckmeyer, Deputy Staff Director, Office of the Staff Director for Management, Board of Governors Ms. Bailey and Mr. English, Deputy Directors, Divisions of Banking Supervision and Regulation and Monetary Affairs, respectively, Board of Governors Mr. Blanchard, Assistant to the Board, Office of Board Members, Board of Governors Messrs. Leahy, Nelson, Reifschneider, and Wascher,1 Associate Directors, Divisions of International Finance, Monetary Affairs, Research and Statistics, and Research and Statistics, respectively, Board of Governors Mr. Gagnon, Visiting Associate Director, Division of Monetary Affairs, Board of Governors Mr. Oliner, Senior Adviser, Division of Research and Statistics, Board of Governors Mr. Lewis, Economist, Division of Monetary Affairs, Board of Governors Ms. Beattie,1 Assistant to the Secretary, Office of the Secretary, Board of Governors Ms. Low, Open Market Secretariat Specialist, Division of Monetary Affairs, Board of Governors Mr. Williams, Records Management Analyst, Division of Monetary Affairs, Board of Governors Mr. Sapenaro, First Vice President, Federal Reserve Bank of St. Louis Messrs. Fuhrer and Rosenblum, Executive Vice Presidents, Federal Reserve Banks of Boston and Dallas, respectively Messrs. Hilton and Schweitzer, Senior Vice Presidents, Federal Reserve Banks of New York and Cleveland, respectively Messrs. Clark, Gavin, Klitgaard, and Yi, Vice Presidents, Federal Reserve Banks of Kansas City, St. Louis, New York, and Philadelphia, respectively Mr. Weber, Senior Research Officer, Federal Reserve Bank of Minneapolis Developments in Financial Markets and the Federal Reserve's Balance SheetThe Manager of the System Open Market Account reported on recent developments in domestic and foreign financial markets. The Manager also reported on System open market operations in Treasury securities and in agency debt and agency mortgage-backed securities (MBS) during the period since the Committee's January 27-28 meeting. By unanimous vote, the Committee ratified those transactions. There were no open market operations in foreign currencies for the System's account during the period since the Committee's January 27-28 meeting. Staff reported on recent developments in System liquidity programs and on changes in the System's balance sheet. As of March 12, the System's total assets and liabilities were about $2 trillion, close to the level of that just before the January 27-28 meeting. Holdings of agency debt and agency MBS had increased, while foreign central bank drawings on reciprocal currency arrangements had declined. Credit extended by the Commercial Paper Funding Facility also had declined, as 90-day paper purchased in the early weeks of the program matured and a large portion was not renewed through the facility. Primary credit extended by the Federal Reserve was about unchanged, and credit outstanding under the Term Auction Facility increased somewhat over the period as the February auctions experienced higher demand than previous auctions. In contrast, credit extended under the Primary Dealer Credit Facility declined somewhat over the intermeeting period, and credit extended under the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility edged down. Most meeting participants interpreted the evidence as indicating that credit markets still were not working well, and that the Federal Reserve's lending programs, asset purchases, and currency swaps were providing much-needed support to economic activity by reducing dislocations in financial markets, lowering the cost of credit, and facilitating the flow of credit to businesses and households. Participants discussed the prospective further increase in the Federal Reserve's balance sheet, with a focus on the Term Asset-Backed Securities Loan Facility (TALF) and open market purchases of longer-term assets. The launch of the TALF was announced on March 3. In the initial phase of the program, the Federal Reserve offered to provide up to $200 billion of three-year loans, on a nonrecourse basis, against AAA-rated asset-backed securities (ABS) backed by newly and recently originated auto loans, credit card loans, student loans, loans guaranteed by the Small Business Administration, and, potentially, certain other closely related types of ABS. The Federal Reserve and the Treasury had previously announced their expectation that the program would be expanded to accept other types of ABS. The demand for TALF funding appeared likely to be modest initially, and some participants saw a risk that private firms might be reluctant to borrow from the TALF out of concern about potential future changes in government policies that could affect TALF borrowers. However, other participants anticipated that TALF loans would increase over time as financial market institutions became more familiar with the program. Most participants supported the expansion of the lending capacity of the TALF, subject to receiving additional capital from the Treasury, and the inclusion of additional categories of recently issued, highly rated ABS as acceptable collateral. However, some participants expressed concern about the risks that might arise from the possible extension of the TALF to include older and lower-quality assets, noting, in particular, the greater uncertainty over the value of such assets. The Federal Reserve's programs to buy direct debt obligations of the federal housing agencies and agency-guaranteed MBS were on track to reach their initial targets of $100 billion and $500 billion, respectively, by the end of June. Participants agreed that the asset purchase programs were helping to reduce mortgage interest rates and improve market functioning, thereby providing support to economic activity. Some participants stated a preference for communicating the Committee's intention regarding such purchases in terms of the growth rate of Federal Reserve holdings rather than a dollar target for total purchases. However, others noted that the pace of MBS issuance was likely to be especially brisk over the next few months, in part because of the Administration's new Making Home Affordable program, and observed that it could be advantageous to be able to front-load purchases to accommodate the pattern of mortgage refinancing. Participants also discussed the relative merits of increasing the Federal Reserve's purchases of agency MBS versus initiating purchases of longer-term Treasury securities. Some participants remarked that experience suggested that purchases of Treasury securities would have effects across a variety of long-term debt markets and should ease financial conditions generally while minimizing the Federal Reserve's influence on the allocation of credit. However, purchases of agency securities could have a more direct effect on mortgage rates, thus providing greater benefits to the housing sector, and on private borrowing rates more generally. Also, some participants were concerned that Federal Reserve purchases of longer-term Treasury securities might be seen as an indication that the Federal Reserve was responding to a fiscal objective rather than its statutory mandate, thus reducing the Federal Reserve's credibility regarding long-run price stability. Most participants, however, saw this risk as low so long as the Federal Reserve was clear about the importance of its long-term price stability objective and demonstrated a commitment to take the necessary steps in the future to achieve its objectives. In light of the economic and financial conditions, meeting participants viewed the expansion of the Federal Reserve's balance sheet that might be associated with these and other programs as appropriate in order to foster the dual objectives of maximum employment and price stability. It was noted that the Treasury and the Federal Reserve will seek legislation to give the Federal Reserve tools in addition to interest on reserves to manage the federal funds rate while providing the funding necessary for the TALF and other key credit-easing programs. The Committee also took up a proposal to augment the existing network of central bank liquidity swap lines by adding several temporary swap lines that could provide foreign currency liquidity to U.S. institutions, analogous to the arrangements that currently provide U.S. dollar liquidity abroad. There was no evidence that these institutions were encountering difficulty in meeting foreign currency obligations at this time, but these facilities would be available should pressures develop in the future. The Committee unanimously approved the following resolution: "The Federal Open Market Committee authorizes the Federal Reserve Bank of New York to enter into additional temporary reciprocal currency arrangements (swap lines) with the Bank of England, the European Central Bank (ECB), the Bank of Japan, and the Swiss National Bank to support the provision of liquidity in British pounds, euros, Japanese yen, and Swiss francs. The swap arrangements with each foreign central bank shall be subject to the following limits: an aggregate amount of up to £30 billion with the Bank of England; an aggregate amount of up to €80 billion with the ECB; an aggregate amount of up to ¥10 trillion with the Bank of Japan; and an aggregate amount of up to SwF 40 billion with the Swiss National Bank. These arrangements shall terminate no later than October 30, 2009, unless extended by mutual agreement of the Committee and the respective foreign central banks. The Committee also authorizes the Federal Reserve Bank of New York to provide the foreign currencies obtained under the arrangements to U.S. financial institutions by means of swap transactions to assist such institutions in meeting short-term liquidity needs in their foreign operations. Requests for drawings on the central bank swap lines and distribution of the foreign currency proceeds to U.S. financial institutions shall be initiated by the appropriate Reserve Bank and approved by the Foreign Currency Subcommittee." Staff Review of the Economic and Financial SituationThe information reviewed at the March 17-18 meeting indicated that economic activity had fallen sharply in recent months. The contraction was reflected in widespread declines in payroll employment and industrial production. Consumer spending appeared to remain at a low level after changing little, on balance, in recent months. The housing market weakened further, and nonresidential construction fell. Business spending on equipment and software continued to fall across a broad range of categories. Despite the cutbacks in production, inventory overhangs appeared to worsen in a number of areas. Both headline and core consumer prices edged up in January and February. Labor market conditions continued to deteriorate. Private payroll employment dropped considerably over the three months ending in February. Employment losses remained widespread across industries, with the notable exception of health care. Meanwhile, the average workweek of production and nonsupervisory workers on private payrolls continued to be low in February, and the number of aggregate hours worked for this group was markedly below the fourth-quarter average. The civilian unemployment rate climbed 1/2 percentage point in February, to 8.1 percent. The labor force participation rate declined in January and February, on balance, likely in response to weakened labor demand. The four-week moving average of initial claims for unemployment insurance continued to move up through early March, and the level of insured unemployed rose further. Industrial production fell in January and February, with cutbacks again widespread, and capacity utilization in manufacturing declined to a very low level. Although production of light motor vehicles turned up in February, it remained well below the pace of the fourth quarter as manufacturers responded to the significant deterioration in demand over the past few months. The output of high-tech products declined as production of computers and semiconductors extended the sharp declines that began in the fourth quarter of 2008. The production of other consumer durables and business equipment weakened further, and broad indicators of near-term manufacturing activity suggested that factory output would continue to contract over the next few months. The available data suggested that real consumer spending held steady, on balance, in the first two months of this year after having fallen sharply over the second half of last year. Real spending on goods excluding motor vehicles was estimated to have edged up, on balance, in January and February. In contrast, real outlays on motor vehicles contracted further in February after a decline in January. The financial strain on households intensified over the previous several months; by the end of the fourth quarter, household net worth for the first time since 1995 had fallen to less than five times disposable income, and substantial declines in equity and house prices continued early this year. Consumer sentiment declined further in February as households voiced greater concerns about income and job prospects. The Reuters/University of Michigan index in early March stood only slightly above its 29-year low reached in November, and the Conference Board index, which includes questions about employment conditions, fell in February to a new low. Housing activity continued to be subdued. Single-family starts ticked up in February, and adjusted permit issuance in this sector moved up to a level slightly above starts. Multifamily starts jumped in February from the very low level in January, and the level of multifamily starts was close to where it had been at the end of the third quarter of 2008. Housing demand remained very weak, however. Although the stock of unsold new single-family homes fell in January to its lowest level since 2003, inventories continued to move up relative to the slow pace of sales. Sales of existing single-family homes fell in January, reversing the uptick seen in December. Over the previous 12 months, the pace of existing home sales declined much less than that of new home sales, reflecting in part increases in foreclosure-related and other distressed sales. The weakness in home sales persisted despite historically low mortgage rates for borrowers eligible for conforming loans. After having fallen significantly late last year, rates for conforming 30-year fixed-rate mortgages fluctuated in a relatively narrow range during the intermeeting period. In contrast, the market for nonconforming loans remained severely impaired. House prices continued to decline. Business spending on transportation equipment continued to fall from already low levels, and demand both for high-tech equipment and software and for equipment other than high-tech and transportation dropped sharply in the fourth quarter. In January, nominal shipments of nondefense capital goods excluding aircraft declined, and new orders fell significantly further. The fundamental determinants of equipment and software spending worsened appreciably: Business output dropped, and rising corporate bond yields boosted the user cost of capital in the fourth quarter. After holding up surprisingly well through most of last year, outlays on nonresidential structures began to show declines consistent with the weak fundamentals for this sector. In real terms, investment declined for most types of buildings over the previous few months. Census data on book-value inventory investment for January suggested that firms had further pared their stocks; however, sales continued to fall more quickly than inventories, apparently exacerbating the overhangs that developed in the second half of 2008. The U.S. international trade deficit narrowed in December and January, as a steep fall in imports more than offset a decline in exports. All major categories of exports decreased, especially sales of industrial supplies, machinery, and automotive products. All major categories of imports decreased as well, with large declines in imports of oil, automotive products, and industrial supplies. The drop in the value of oil imports reflected a lower price. Imports of automotive products declined as automakers made significant production cutbacks throughout North America. Output in the advanced foreign economies contracted in the fourth quarter, with large reductions in real gross domestic product (GDP) in all the major economies and a double-digit rate of decline in Japan. Trade and investment in those countries were particularly weak. Indicators of economic activity, especially industrial production, suggested that the pace of contraction accelerated late in the fourth quarter and into the first quarter. Economic activity in emerging market economies also weakened significantly in the fourth quarter. Exports, industrial production, and confidence indicators dropped notably in both Latin America and emerging Asia. Incoming data for January and February suggested a further significant decline in the first quarter. In the United States, overall consumer prices increased in January and February, led by an increase in energy prices, after posting sizable declines late last year. Excluding the categories of food and energy, consumer prices edged higher in January and February after three months of no change. The producer price index for core intermediate materials dropped for a fifth month in February, reflecting, in part, weaker global demand and steep declines in the prices of a wide variety of energy-intensive goods, such as chemicals and plastics. Low readings on overall and core consumer price inflation in recent months, as well as the weakened economic outlook, kept near-term inflation expectations reported in surveys well below their high levels in mid-2008. In contrast, measures of longer-term expectations remained close to their averages over the past couple of years. Hourly earnings continued to increase at a moderate rate in February. The Federal Open Market Committee's decision at the January meeting to leave the target range for the federal funds rate unchanged was widely anticipated by investors and had little impact on short-term money markets. Over the intermeeting period, the path for the federal funds rate implied by futures rates shifted down somewhat, on net, mostly on incoming news about the financial sector and the economic outlook. Yields on nominal Treasury coupon securities increased over the period, reportedly because market participants had assigned some probability to the possibility that the Federal Reserve would establish a purchase program for longer-term Treasury securities that was not, in fact, forthcoming; yields were also reported to have responded to concerns over the federal deficit and the growing supply of Treasury securities. Yields on longer-term inflation-indexed Treasury securities increased more than those on their nominal counterparts, leaving longer-term inflation compensation lower over the period, and inflation compensation at shorter horizons was little changed. Poor liquidity in the market for Treasury inflation-protected securities continued to make these readings difficult to interpret. Conditions in short-term funding markets were mixed over the intermeeting period. In unsecured interbank funding markets, spreads of dollar London interbank offered rates (Libor) over comparable-maturity overnight index swap rates trended higher, on net, especially at longer maturities, and forward spreads increased, evidently on renewed concerns about the financial condition of some large banks. Conditions in the commercial paper (CP) market continued to improve, on balance, over the intermeeting period. Spreads on 30-day A2/P2-rated CP trended down further, and those on AA-rated asset-backed commercial paper remained at the lower end of the range recorded over the past year. Conditions in repurchase agreement markets for most collateral types improved over the period, but volumes remained low. Trading conditions in the secondary market for nominal Treasury coupon securities showed some limited signs of improvement. Average bid-asked spreads for on-the-run nominal Treasury notes were relatively stable near their pre-crisis levels. Daily trading volumes for on-the-run securities, however, inched lower, and spreads between the yields of on- and off-the-run 10-year Treasury notes remained very high. Broad equity price indexes dropped significantly, on balance, over the intermeeting period amid continued concerns about the health of the financial sector, uncertainty regarding the efficacy of government support to the sector, and a further weakening of the economic outlook. Bank stock prices were particularly hard hit, and the credit default swap (CDS) spreads of many banks rose above the peaks recorded last fall on anxieties about the financial conditions of the largest banking firms. Stock prices of insurance companies dropped sharply over the period, reflecting concerns about the adequacy of their capital positions. On March 2, American International Group, Inc. (AIG), reported losses of more than $60 billion for the fourth quarter of last year, and the Treasury and the Federal Reserve announced a restructuring of the government assistance to AIG to enhance the company's capital and liquidity to facilitate the orderly completion of its global divestiture program. Measures of liquidity in the secondary market for speculative-grade corporate bonds worsened somewhat over the period but remained significantly better than in the fall of 2008. Spreads of yields on both BBB-rated and speculative-grade bonds relative to those on comparable-maturity Treasury securities were little changed on net. The investment- and speculative-grade CDS indexes widened significantly, on net, over the intermeeting period. Gross bond issuance by nonfinancial firms was very strong in January and February, as investment-grade issuance more than doubled from its already solid pace in the fourth quarter; speculative-grade issuance, however, remained sluggish. Trading conditions in the leveraged syndicated loan market improved slightly, but issuance continued to be very weak. The market for commercial mortgage-backed securities (CMBS) also remained under heavy stress. Indexes of CDS spreads on AAA-rated CMBS widened to record levels, as Moody's downgraded a large portion of the 2006 and 2007 vintages after a reevaluation of its rating criteria. The debt of the domestic private nonfinancial sector, which was about unchanged in the fourth quarter of last year, was estimated to have remained about flat in the first quarter. Household debt appeared to have contracted in the first quarter for the second quarter in a row, primarily as a result of declines in both consumer and home mortgage debt. Declines in consumer and mortgage debt stemmed, in turn, from very weak household spending, the continued drop in house prices, and tighter terms and standards for loans. Business debt was projected to expand at a moderate pace in the first quarter, largely because of a burst of corporate bond issuance. Reflecting heavy borrowing by the Treasury, total debt of the domestic nonfinancial sector was projected to have continued to expand in the first quarter, but at a pace below that recorded in the fourth quarter of last year. The rise in M2 slowed in February from the rapid pace recorded over the previous few months. Liquid deposits, while decelerating, continued to expand briskly. Savings deposits increased while demand deposits decreased. Retail money funds fell in February, reflecting sizable outflows from Treasury-only funds, which generally provided low yields. Small time deposits also contracted, as the institutions that had been bidding aggressively for these retail funds stopped doing so. The expansion in currency remained robust. Bank credit continued to decline in January and February, and commercial and industrial (C&I) loans decreased over these months. The February Survey of Terms of Business Lending indicated that C&I loan rate spreads over comparable-maturity market instruments rose modestly overall from the November survey. Commercial real estate loans outstanding also declined over the first part of 2009. In contrast, consumer loans on banks' books jumped over the first two months of the year because of sizable increases at a few banks that purchased loans from their affiliated finance companies. In addition, some banks brought consumer loans that had previously been securitized back onto their books. After 12 consecutive months of contraction, residential mortgage loans on banks' books increased in February, likely a result of the pickup in refinancing activity. In contrast, the rise in home equity loans slowed noticeably in January and February. Among the advanced foreign economies, headline equity price indexes generally fell significantly over the period, with the sharpest drops in the banking sector. In particular, European bank shares fell steeply as earnings reports for the fourth quarter came in weaker than expected and fears about the exposure of many western European banks to emerging Europe increased. The major currencies index of the dollar rose, on net, over the intermeeting period; foremost among the contributors to the rise was a significant appreciation of the dollar against the yen. Financial conditions in emerging markets also worsened, with their exchange rates and equity prices generally falling and CDS premiums rising a bit on balance. Several foreign governments and central banks took further steps to support their financial markets and economies. The Bank of England announced its intention to purchase substantial quantities of government and corporate bonds through its Asset Purchase Facility, after which yields on long-term British gilts fell significantly. In addition, the British government launched its Asset Protection Scheme, which insured assets placed in the scheme by the Royal Bank of Scotland and Lloyds Bank. The Bank of Japan stated that it would resume purchases of equities held on banks' balance sheets, announced plans to purchase corporate bonds, and began its previously announced purchases of commercial paper. The Swiss National Bank announced that it would purchase both domestic corporate debt and foreign currency to increase liquidity. Staff Economic OutlookIn the forecast prepared for the meeting, the staff revised down its outlook for economic activity. The deterioration in labor market conditions was rapid in recent months, with steep job losses across nearly all sectors. Industrial production continued to contract rapidly as firms responded to the falloff in demand and the buildup of some inventory overhangs. The incoming data on business spending suggested that business investment in equipment and structures continued to decline. Single-family housing starts had fallen to a post-World War II low in January, and demand for new homes remained weak. Both exports and imports retreated significantly in the fourth quarter of last year and appeared headed for comparable declines this quarter. Consumer outlays showed some signs of stabilizing at a low level, with real outlays for goods outside of motor vehicles recording gains in January and February. Financial conditions overall were even less supportive of economic activity, with broad equity indexes down significantly amid continued concerns about the health of the financial sector, the dollar stronger, and long-term interest rates higher. The staff's projections for real GDP in the second half of 2009 and in 2010 were revised down, with real GDP expected to flatten out gradually over the second half of this year and then to expand slowly next year as the stresses in financial markets ease, the effects of fiscal stimulus take hold, inventory adjustments are worked through, and the correction in housing activity comes to an end. The weaker trajectory of real output resulted in the projected path of the unemployment rate rising more steeply into early next year before flattening out at a high level over the rest of the year. The staff forecast for overall and core personal consumption expenditures (PCE) inflation over the next two years was revised down slightly. Both core and overall PCE price inflation were expected to be damped by low rates of resource utilization, falling import prices, and easing cost pressures as a result of the sharp net declines in oil and other raw materials prices since last summer. Meeting Participants' Views and Committee Policy ActionIn the discussion of the economic situation and outlook, nearly all meeting participants said that conditions had deteriorated relative to their expectations at the time of the January meeting. The slowdown was widespread across sectors. Large declines in equity prices, a further drop in house prices, and mounting job losses threatened to further depress consumer spending, despite some firming in the recent retail sales data and forthcoming tax reductions. Business capital spending was weakening in an environment of uncertainty and low business confidence. Of particular note was the apparent sharp fall in foreign economic activity, which was having a negative effect on U.S. exports. Credit conditions remained very tight, and financial markets remained fragile and unsettled, with pressures on financial institutions generally intensifying this year. Overall, participants expressed concern about downside risks to an outlook for activity that was already weak. With regard to the outlook for inflation, all participants agreed that inflation pressures were likely to remain subdued, and several expressed the view that inflation was likely to persist below desirable levels. District business contacts indicated that production and sales were declining steeply. Some industries that previously were less affected, such as agriculture and energy, had begun to suffer the effects of the slowdown. Businesses reported that bank financing was becoming more expensive and more difficult to obtain. Expenditures were being cut substantially for a wide range of capital equipment, and spending on nonresidential structures had recently turned down. Inventory liquidation was continuing, but inventory-sales ratios remained elevated as sales slowed. Against this backdrop, participants anticipated further employment cutbacks over coming months, though perhaps at a gradually diminishing rate. Several participants said that the degree and pervasiveness of the decline in foreign economic activity was one of the most notable developments since the January meeting. In light of this development, it was widely agreed that exports were not likely to be a source of support for U.S. economic activity in the near term. Participants did not interpret the uptick in housing starts in February as the beginning of a new trend, but some noted that there was only limited scope for housing activity to fall further. Nonetheless, large inventories of unsold homes relative to sales and the prospect of a continued high level of distressed sales would continue to hold down residential investment in the near term. Several participants noted the tentative signs of stabilization in consumer spending in January and February. However, others suggested that strains on household balance sheets from falling equity and house prices, reduced credit availability, and the fear of unemployment could well lead to further increases in the saving rate that would damp consumption growth in the near term. Overall, most participants viewed downside risks as predominating in the near term, mainly owing to potential adverse feedback effects as reduced employment and production weighed on consumer spending and investment, and as the weakening economy boosted the prospective losses of financial institutions, leading to a further tightening of credit conditions. Looking beyond the very near term, a number of market forces and policies now in place were seen as eventually leading to economic recovery. Notably, the low level of mortgage interest rates, reduced house prices, and the Administration's new programs to encourage mortgage refinancing and mitigate foreclosures ultimately could bring about a lower cost of homeownership, a sustained increase in home sales, and a stabilization of house prices. The household saving rate, which had already risen considerably, would eventually level out and cease to hold back consumption growth. Business inventories would come into line with even a low level of sales, and the pressure on production from inventory drawdowns would diminish. Fiscal and monetary policies were likely to contribute significantly to aggregate demand in coming quarters. Participants expressed a variety of views about the strength and timing of the recovery, however. Some believed that the natural resilience of market forces would become evident later this year. Others, who saw recovery as delayed and potentially weak, were concerned about a possible further rise in the saving rate and a very slow improvement in financial conditions. Some participants also cautioned that, because of the poor functioning of the financial system, capital and labor were not being allocated to their most productive uses, and this failure threatened to damp the recovery and reduce the potential growth of the economy over the medium term. Participants saw little chance of a pickup in inflation over the near term, as rising unemployment and falling capacity utilization were holding down wages and prices and inflation expectations appeared subdued. Several expressed concern that inflation was likely to persist below desired levels, with a few pointing to the risk of deflation. Even without a continuation of outright price declines, falling expectations of inflation would raise the real rate of interest and thus increase the burden of debt and further restrain the economy. Some indicators, including share prices and CDS spreads of financial institutions, suggested a worsening of financial market strains since January. However, for the most part, participants viewed conditions in financial markets as little changed but remaining extraordinarily stressed. The large volume of issuance of investment-grade corporate bonds in recent weeks was a notable bright spot. Participants shared comments received from financial industry contacts on their experiences with and concerns about recent government programs to stabilize the financial system. These contacts feared that uncertainties about future actions the government might take and future regulations it might impose were making it more difficult to plan and were discouraging participation in government efforts to stabilize the financial system. Participants agreed that a credible and widely understood program to deal with the troubles of the banking system could help restore business and consumer confidence. Many viewed the strengthening of the banking system as essential for a sustained and robust recovery. In the discussion of monetary policy for the intermeeting period, Committee members agreed that substantial additional purchases of longer-term assets eligible for open market operations would be appropriate. Such purchases would provide further monetary stimulus to help address the very weak economic outlook and reduce the risk that inflation could persist for a time below rates that best foster longer-term economic growth and price stability. One member preferred to focus additional purchases on longer-term Treasury securities, whereas another member preferred to focus on agency MBS. However, both could support expanded purchases across a range of assets, and several members noted that working across a range of assets and instruments was appropriate when the effects of any one tactic were uncertain. Members agreed that the monetary base was likely to grow significantly as a consequence of additional asset purchases; one, in particular, stressed that sustained increases in the monetary base were important to ensure that policy was consistently expansionary. Members expressed a range of views as to the preferred size of the increase in purchases. Several members felt that the significant deterioration in the economic outlook merited a very substantial increase in purchases of longer-term assets. In contrast, the potential for a large increase over time in the size of the balance sheet from the TALF program was seen as supporting a more modest, though still substantial, increase in asset purchases. Ultimately, members agreed to undertake additional purchases of agency MBS of up to $750 billion and of agency debt of up to $100 billion, and they also agreed to purchase up to $300 billion of longer-term Treasury securities. The Committee believed that purchases of these amounts would help to promote a return to economic growth and price stability. The period for conducting the agency debt and MBS purchases was extended from the next three months to the next nine months; members agreed to allow the Desk flexibility within this horizon to respond to market conditions. Treasury purchases were to be conducted over the next six months. Members also noted the recent launch of the TALF, and they agreed to include in the Committee's statement an indication that the range of assets accepted as eligible collateral for the TALF was likely to be expanded. Committee members decided to keep the target range for the federal funds rate at 0 to 1/4 percent and to communicate to the public the Committee's view that the federal funds rate was likely to remain exceptionally low for an extended period. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to purchase GSE debt, GSE-guaranteed MBS, and longer-term Treasury securities during the intermeeting period with the aim of providing support to private credit markets and economic activity. The timing and pace of these purchases should depend on conditions in the markets for such securities and on a broader assessment of private credit market conditions. The Committee anticipates that the combination of outright purchases and various liquidity facilities outstanding will cause the size of the Federal Reserve's balance sheet to expand significantly in coming months. The Desk is expected to purchase up to $200 billion in housing-related GSE debt by the end of this year. The Desk is expected to purchase at least $500 billion in GSE-guaranteed MBS by the end of the second quarter of this year and is expected to purchase up to $1.25 trillion of these securities by the end of this year. The Committee also directs the Desk to purchase longer-term Treasury securities during the intermeeting period. Over the next six months, the Desk is expected to purchase up to $300 billion of longer-term Treasury securities. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability." The vote encompassed approval of the statement below to be released at 2:15 p.m.: "Information received since the Federal Open Market Committee met in January indicates that the economy continues to contract. Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending. Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment. U.S. exports have slumped as a number of major trading partners have also fallen into recession. Although the near-term economic outlook is weak, the Committee anticipates that policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth. In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term. In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve's balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months. The Federal Reserve has launched the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses and anticipates that the range of eligible collateral for this facility is likely to be expanded to include other financial assets. The Committee will continue to carefully monitor the size and composition of the Federal Reserve's balance sheet in light of evolving financial and economic developments." Voting for this action: Messrs. Bernanke and Dudley, Ms. Duke, Messrs. Evans, Kohn, Lacker, Lockhart, Tarullo, and Warsh, and Ms. Yellen. Voting against this action: None. It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, April 28-29, 2009. The meeting adjourned at 1:35 p.m. on March 18, 2009. Conference CallOn February 7, 2009, the Committee met by conference call in a joint session with the Board of Governors to discuss the potential role of the Federal Reserve in the Treasury's forthcoming financial stabilization plan. After hearing an overview of the version of the plan envisioned at the time of the meeting, meeting participants discussed its principal elements and shared a range of perspectives on its implications for financial markets and institutions. The Federal Reserve's primary direct role in the plan would be through an expansion of the previously announced TALF, which would be supported by additional funds from the Troubled Asset Relief Program (TARP). In the current environment, it was anticipated that such an expansion would provide additional assistance to financial markets and institutions in meeting the credit needs of households and businesses and thus would support overall economic activity. While several participants expressed some concern that the expansion of the TALF program could increase the Federal Reserve's exposure to credit risk, the program's requirements for highly rated collateral that would exceed the value of the related loans, in combination with the added TARP funds as a backstop against losses, were generally seen as providing the Federal Reserve with adequate protection. Participants also discussed the implications of the expanded TALF program for the Federal Reserve's balance sheet over time. Participants agreed it would be important to work with the Treasury to obtain tools to ensure that any reserves added to the banking system through this program could be removed at the appropriate time. Notation VoteBy notation vote completed on February 17, 2009, the Committee unanimously approved the minutes of the FOMC meeting held on January 27-28, 2009. _____________________________ Brian F. MadiganSecretary 1. Attended Tuesday's session only. 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2009-03-17

Statement

Information received since the Federal Open Market Committee met in January indicates that the economy continues to contract.  Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending.  Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment.  U.S. exports have slumped as a number of major trading partners have also fallen into recession.  Although the near-term economic outlook is weak, the Committee anticipates that policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth. In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued.  Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term. In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability.  The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.  To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion.  Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months.  The Federal Reserve has launched the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses and anticipates that the range of eligible collateral for this facility is likely to be expanded to include other financial assets.  The Committee will continue to carefully monitor the size and composition of the Federal Reserve's balance sheet in light of evolving financial and economic developments. Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

N/A

Minute

A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, March 17, 2009, at 2:00 p.m. and continued on Wednesday, March 18, 2009, at 9:00 a.m. PRESENT: Mr. Bernanke, ChairmanMr. Dudley, Vice ChairmanMs. DukeMr. EvansMr. KohnMr. LackerMr. LockhartMr. Tarullo Mr. WarshMs. Yellen Mr. Bullard, Ms. Cumming, Mr. Hoenig, Ms. Pianalto, and Mr. Rosengren, Alternate Members of the Federal Open Market Committee Messrs. Fisher, Plosser, and Stern, Presidents of the Federal Reserve Banks of Dallas, Philadelphia, and Minneapolis, respectively Mr. Madigan, Secretary and EconomistMs. Danker, Deputy SecretaryMr. Luecke, Assistant SecretaryMr. Skidmore, Assistant SecretaryMs. Smith, Assistant SecretaryMr. Alvarez, General CounselMr. Baxter, Deputy General CounselMr. Sheets, Economist Mr. Stockton, Economist Messrs. Altig, Clouse, Connors, Kamin, Slifman, Sullivan, Weinberg, Wilcox, and Williams, Associate Economists Ms. Mosser, Temporary Manager, System Open Market Account Ms. Johnson, Secretary of the Board, Office of the Secretary, Board of Governors Mr. Frierson, Deputy Secretary, Office of the Secretary, Board of Governors Mr. Struckmeyer, Deputy Staff Director, Office of the Staff Director for Management, Board of Governors Ms. Bailey and Mr. English, Deputy Directors, Divisions of Banking Supervision and Regulation and Monetary Affairs, respectively, Board of Governors Mr. Blanchard, Assistant to the Board, Office of Board Members, Board of Governors Messrs. Leahy, Nelson, Reifschneider, and Wascher,1 Associate Directors, Divisions of International Finance, Monetary Affairs, Research and Statistics, and Research and Statistics, respectively, Board of Governors Mr. Gagnon, Visiting Associate Director, Division of Monetary Affairs, Board of Governors Mr. Oliner, Senior Adviser, Division of Research and Statistics, Board of Governors Mr. Lewis, Economist, Division of Monetary Affairs, Board of Governors Ms. Beattie,1 Assistant to the Secretary, Office of the Secretary, Board of Governors Ms. Low, Open Market Secretariat Specialist, Division of Monetary Affairs, Board of Governors Mr. Williams, Records Management Analyst, Division of Monetary Affairs, Board of Governors Mr. Sapenaro, First Vice President, Federal Reserve Bank of St. Louis Messrs. Fuhrer and Rosenblum, Executive Vice Presidents, Federal Reserve Banks of Boston and Dallas, respectively Messrs. Hilton and Schweitzer, Senior Vice Presidents, Federal Reserve Banks of New York and Cleveland, respectively Messrs. Clark, Gavin, Klitgaard, and Yi, Vice Presidents, Federal Reserve Banks of Kansas City, St. Louis, New York, and Philadelphia, respectively Mr. Weber, Senior Research Officer, Federal Reserve Bank of Minneapolis Developments in Financial Markets and the Federal Reserve's Balance SheetThe Manager of the System Open Market Account reported on recent developments in domestic and foreign financial markets. The Manager also reported on System open market operations in Treasury securities and in agency debt and agency mortgage-backed securities (MBS) during the period since the Committee's January 27-28 meeting. By unanimous vote, the Committee ratified those transactions. There were no open market operations in foreign currencies for the System's account during the period since the Committee's January 27-28 meeting. Staff reported on recent developments in System liquidity programs and on changes in the System's balance sheet. As of March 12, the System's total assets and liabilities were about $2 trillion, close to the level of that just before the January 27-28 meeting. Holdings of agency debt and agency MBS had increased, while foreign central bank drawings on reciprocal currency arrangements had declined. Credit extended by the Commercial Paper Funding Facility also had declined, as 90-day paper purchased in the early weeks of the program matured and a large portion was not renewed through the facility. Primary credit extended by the Federal Reserve was about unchanged, and credit outstanding under the Term Auction Facility increased somewhat over the period as the February auctions experienced higher demand than previous auctions. In contrast, credit extended under the Primary Dealer Credit Facility declined somewhat over the intermeeting period, and credit extended under the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility edged down. Most meeting participants interpreted the evidence as indicating that credit markets still were not working well, and that the Federal Reserve's lending programs, asset purchases, and currency swaps were providing much-needed support to economic activity by reducing dislocations in financial markets, lowering the cost of credit, and facilitating the flow of credit to businesses and households. Participants discussed the prospective further increase in the Federal Reserve's balance sheet, with a focus on the Term Asset-Backed Securities Loan Facility (TALF) and open market purchases of longer-term assets. The launch of the TALF was announced on March 3. In the initial phase of the program, the Federal Reserve offered to provide up to $200 billion of three-year loans, on a nonrecourse basis, against AAA-rated asset-backed securities (ABS) backed by newly and recently originated auto loans, credit card loans, student loans, loans guaranteed by the Small Business Administration, and, potentially, certain other closely related types of ABS. The Federal Reserve and the Treasury had previously announced their expectation that the program would be expanded to accept other types of ABS. The demand for TALF funding appeared likely to be modest initially, and some participants saw a risk that private firms might be reluctant to borrow from the TALF out of concern about potential future changes in government policies that could affect TALF borrowers. However, other participants anticipated that TALF loans would increase over time as financial market institutions became more familiar with the program. Most participants supported the expansion of the lending capacity of the TALF, subject to receiving additional capital from the Treasury, and the inclusion of additional categories of recently issued, highly rated ABS as acceptable collateral. However, some participants expressed concern about the risks that might arise from the possible extension of the TALF to include older and lower-quality assets, noting, in particular, the greater uncertainty over the value of such assets. The Federal Reserve's programs to buy direct debt obligations of the federal housing agencies and agency-guaranteed MBS were on track to reach their initial targets of $100 billion and $500 billion, respectively, by the end of June. Participants agreed that the asset purchase programs were helping to reduce mortgage interest rates and improve market functioning, thereby providing support to economic activity. Some participants stated a preference for communicating the Committee's intention regarding such purchases in terms of the growth rate of Federal Reserve holdings rather than a dollar target for total purchases. However, others noted that the pace of MBS issuance was likely to be especially brisk over the next few months, in part because of the Administration's new Making Home Affordable program, and observed that it could be advantageous to be able to front-load purchases to accommodate the pattern of mortgage refinancing. Participants also discussed the relative merits of increasing the Federal Reserve's purchases of agency MBS versus initiating purchases of longer-term Treasury securities. Some participants remarked that experience suggested that purchases of Treasury securities would have effects across a variety of long-term debt markets and should ease financial conditions generally while minimizing the Federal Reserve's influence on the allocation of credit. However, purchases of agency securities could have a more direct effect on mortgage rates, thus providing greater benefits to the housing sector, and on private borrowing rates more generally. Also, some participants were concerned that Federal Reserve purchases of longer-term Treasury securities might be seen as an indication that the Federal Reserve was responding to a fiscal objective rather than its statutory mandate, thus reducing the Federal Reserve's credibility regarding long-run price stability. Most participants, however, saw this risk as low so long as the Federal Reserve was clear about the importance of its long-term price stability objective and demonstrated a commitment to take the necessary steps in the future to achieve its objectives. In light of the economic and financial conditions, meeting participants viewed the expansion of the Federal Reserve's balance sheet that might be associated with these and other programs as appropriate in order to foster the dual objectives of maximum employment and price stability. It was noted that the Treasury and the Federal Reserve will seek legislation to give the Federal Reserve tools in addition to interest on reserves to manage the federal funds rate while providing the funding necessary for the TALF and other key credit-easing programs. The Committee also took up a proposal to augment the existing network of central bank liquidity swap lines by adding several temporary swap lines that could provide foreign currency liquidity to U.S. institutions, analogous to the arrangements that currently provide U.S. dollar liquidity abroad. There was no evidence that these institutions were encountering difficulty in meeting foreign currency obligations at this time, but these facilities would be available should pressures develop in the future. The Committee unanimously approved the following resolution: "The Federal Open Market Committee authorizes the Federal Reserve Bank of New York to enter into additional temporary reciprocal currency arrangements (swap lines) with the Bank of England, the European Central Bank (ECB), the Bank of Japan, and the Swiss National Bank to support the provision of liquidity in British pounds, euros, Japanese yen, and Swiss francs. The swap arrangements with each foreign central bank shall be subject to the following limits: an aggregate amount of up to £30 billion with the Bank of England; an aggregate amount of up to €80 billion with the ECB; an aggregate amount of up to ¥10 trillion with the Bank of Japan; and an aggregate amount of up to SwF 40 billion with the Swiss National Bank. These arrangements shall terminate no later than October 30, 2009, unless extended by mutual agreement of the Committee and the respective foreign central banks. The Committee also authorizes the Federal Reserve Bank of New York to provide the foreign currencies obtained under the arrangements to U.S. financial institutions by means of swap transactions to assist such institutions in meeting short-term liquidity needs in their foreign operations. Requests for drawings on the central bank swap lines and distribution of the foreign currency proceeds to U.S. financial institutions shall be initiated by the appropriate Reserve Bank and approved by the Foreign Currency Subcommittee." Staff Review of the Economic and Financial SituationThe information reviewed at the March 17-18 meeting indicated that economic activity had fallen sharply in recent months. The contraction was reflected in widespread declines in payroll employment and industrial production. Consumer spending appeared to remain at a low level after changing little, on balance, in recent months. The housing market weakened further, and nonresidential construction fell. Business spending on equipment and software continued to fall across a broad range of categories. Despite the cutbacks in production, inventory overhangs appeared to worsen in a number of areas. Both headline and core consumer prices edged up in January and February. Labor market conditions continued to deteriorate. Private payroll employment dropped considerably over the three months ending in February. Employment losses remained widespread across industries, with the notable exception of health care. Meanwhile, the average workweek of production and nonsupervisory workers on private payrolls continued to be low in February, and the number of aggregate hours worked for this group was markedly below the fourth-quarter average. The civilian unemployment rate climbed 1/2 percentage point in February, to 8.1 percent. The labor force participation rate declined in January and February, on balance, likely in response to weakened labor demand. The four-week moving average of initial claims for unemployment insurance continued to move up through early March, and the level of insured unemployed rose further. Industrial production fell in January and February, with cutbacks again widespread, and capacity utilization in manufacturing declined to a very low level. Although production of light motor vehicles turned up in February, it remained well below the pace of the fourth quarter as manufacturers responded to the significant deterioration in demand over the past few months. The output of high-tech products declined as production of computers and semiconductors extended the sharp declines that began in the fourth quarter of 2008. The production of other consumer durables and business equipment weakened further, and broad indicators of near-term manufacturing activity suggested that factory output would continue to contract over the next few months. The available data suggested that real consumer spending held steady, on balance, in the first two months of this year after having fallen sharply over the second half of last year. Real spending on goods excluding motor vehicles was estimated to have edged up, on balance, in January and February. In contrast, real outlays on motor vehicles contracted further in February after a decline in January. The financial strain on households intensified over the previous several months; by the end of the fourth quarter, household net worth for the first time since 1995 had fallen to less than five times disposable income, and substantial declines in equity and house prices continued early this year. Consumer sentiment declined further in February as households voiced greater concerns about income and job prospects. The Reuters/University of Michigan index in early March stood only slightly above its 29-year low reached in November, and the Conference Board index, which includes questions about employment conditions, fell in February to a new low. Housing activity continued to be subdued. Single-family starts ticked up in February, and adjusted permit issuance in this sector moved up to a level slightly above starts. Multifamily starts jumped in February from the very low level in January, and the level of multifamily starts was close to where it had been at the end of the third quarter of 2008. Housing demand remained very weak, however. Although the stock of unsold new single-family homes fell in January to its lowest level since 2003, inventories continued to move up relative to the slow pace of sales. Sales of existing single-family homes fell in January, reversing the uptick seen in December. Over the previous 12 months, the pace of existing home sales declined much less than that of new home sales, reflecting in part increases in foreclosure-related and other distressed sales. The weakness in home sales persisted despite historically low mortgage rates for borrowers eligible for conforming loans. After having fallen significantly late last year, rates for conforming 30-year fixed-rate mortgages fluctuated in a relatively narrow range during the intermeeting period. In contrast, the market for nonconforming loans remained severely impaired. House prices continued to decline. Business spending on transportation equipment continued to fall from already low levels, and demand both for high-tech equipment and software and for equipment other than high-tech and transportation dropped sharply in the fourth quarter. In January, nominal shipments of nondefense capital goods excluding aircraft declined, and new orders fell significantly further. The fundamental determinants of equipment and software spending worsened appreciably: Business output dropped, and rising corporate bond yields boosted the user cost of capital in the fourth quarter. After holding up surprisingly well through most of last year, outlays on nonresidential structures began to show declines consistent with the weak fundamentals for this sector. In real terms, investment declined for most types of buildings over the previous few months. Census data on book-value inventory investment for January suggested that firms had further pared their stocks; however, sales continued to fall more quickly than inventories, apparently exacerbating the overhangs that developed in the second half of 2008. The U.S. international trade deficit narrowed in December and January, as a steep fall in imports more than offset a decline in exports. All major categories of exports decreased, especially sales of industrial supplies, machinery, and automotive products. All major categories of imports decreased as well, with large declines in imports of oil, automotive products, and industrial supplies. The drop in the value of oil imports reflected a lower price. Imports of automotive products declined as automakers made significant production cutbacks throughout North America. Output in the advanced foreign economies contracted in the fourth quarter, with large reductions in real gross domestic product (GDP) in all the major economies and a double-digit rate of decline in Japan. Trade and investment in those countries were particularly weak. Indicators of economic activity, especially industrial production, suggested that the pace of contraction accelerated late in the fourth quarter and into the first quarter. Economic activity in emerging market economies also weakened significantly in the fourth quarter. Exports, industrial production, and confidence indicators dropped notably in both Latin America and emerging Asia. Incoming data for January and February suggested a further significant decline in the first quarter. In the United States, overall consumer prices increased in January and February, led by an increase in energy prices, after posting sizable declines late last year. Excluding the categories of food and energy, consumer prices edged higher in January and February after three months of no change. The producer price index for core intermediate materials dropped for a fifth month in February, reflecting, in part, weaker global demand and steep declines in the prices of a wide variety of energy-intensive goods, such as chemicals and plastics. Low readings on overall and core consumer price inflation in recent months, as well as the weakened economic outlook, kept near-term inflation expectations reported in surveys well below their high levels in mid-2008. In contrast, measures of longer-term expectations remained close to their averages over the past couple of years. Hourly earnings continued to increase at a moderate rate in February. The Federal Open Market Committee's decision at the January meeting to leave the target range for the federal funds rate unchanged was widely anticipated by investors and had little impact on short-term money markets. Over the intermeeting period, the path for the federal funds rate implied by futures rates shifted down somewhat, on net, mostly on incoming news about the financial sector and the economic outlook. Yields on nominal Treasury coupon securities increased over the period, reportedly because market participants had assigned some probability to the possibility that the Federal Reserve would establish a purchase program for longer-term Treasury securities that was not, in fact, forthcoming; yields were also reported to have responded to concerns over the federal deficit and the growing supply of Treasury securities. Yields on longer-term inflation-indexed Treasury securities increased more than those on their nominal counterparts, leaving longer-term inflation compensation lower over the period, and inflation compensation at shorter horizons was little changed. Poor liquidity in the market for Treasury inflation-protected securities continued to make these readings difficult to interpret. Conditions in short-term funding markets were mixed over the intermeeting period. In unsecured interbank funding markets, spreads of dollar London interbank offered rates (Libor) over comparable-maturity overnight index swap rates trended higher, on net, especially at longer maturities, and forward spreads increased, evidently on renewed concerns about the financial condition of some large banks. Conditions in the commercial paper (CP) market continued to improve, on balance, over the intermeeting period. Spreads on 30-day A2/P2-rated CP trended down further, and those on AA-rated asset-backed commercial paper remained at the lower end of the range recorded over the past year. Conditions in repurchase agreement markets for most collateral types improved over the period, but volumes remained low. Trading conditions in the secondary market for nominal Treasury coupon securities showed some limited signs of improvement. Average bid-asked spreads for on-the-run nominal Treasury notes were relatively stable near their pre-crisis levels. Daily trading volumes for on-the-run securities, however, inched lower, and spreads between the yields of on- and off-the-run 10-year Treasury notes remained very high. Broad equity price indexes dropped significantly, on balance, over the intermeeting period amid continued concerns about the health of the financial sector, uncertainty regarding the efficacy of government support to the sector, and a further weakening of the economic outlook. Bank stock prices were particularly hard hit, and the credit default swap (CDS) spreads of many banks rose above the peaks recorded last fall on anxieties about the financial conditions of the largest banking firms. Stock prices of insurance companies dropped sharply over the period, reflecting concerns about the adequacy of their capital positions. On March 2, American International Group, Inc. (AIG), reported losses of more than $60 billion for the fourth quarter of last year, and the Treasury and the Federal Reserve announced a restructuring of the government assistance to AIG to enhance the company's capital and liquidity to facilitate the orderly completion of its global divestiture program. Measures of liquidity in the secondary market for speculative-grade corporate bonds worsened somewhat over the period but remained significantly better than in the fall of 2008. Spreads of yields on both BBB-rated and speculative-grade bonds relative to those on comparable-maturity Treasury securities were little changed on net. The investment- and speculative-grade CDS indexes widened significantly, on net, over the intermeeting period. Gross bond issuance by nonfinancial firms was very strong in January and February, as investment-grade issuance more than doubled from its already solid pace in the fourth quarter; speculative-grade issuance, however, remained sluggish. Trading conditions in the leveraged syndicated loan market improved slightly, but issuance continued to be very weak. The market for commercial mortgage-backed securities (CMBS) also remained under heavy stress. Indexes of CDS spreads on AAA-rated CMBS widened to record levels, as Moody's downgraded a large portion of the 2006 and 2007 vintages after a reevaluation of its rating criteria. The debt of the domestic private nonfinancial sector, which was about unchanged in the fourth quarter of last year, was estimated to have remained about flat in the first quarter. Household debt appeared to have contracted in the first quarter for the second quarter in a row, primarily as a result of declines in both consumer and home mortgage debt. Declines in consumer and mortgage debt stemmed, in turn, from very weak household spending, the continued drop in house prices, and tighter terms and standards for loans. Business debt was projected to expand at a moderate pace in the first quarter, largely because of a burst of corporate bond issuance. Reflecting heavy borrowing by the Treasury, total debt of the domestic nonfinancial sector was projected to have continued to expand in the first quarter, but at a pace below that recorded in the fourth quarter of last year. The rise in M2 slowed in February from the rapid pace recorded over the previous few months. Liquid deposits, while decelerating, continued to expand briskly. Savings deposits increased while demand deposits decreased. Retail money funds fell in February, reflecting sizable outflows from Treasury-only funds, which generally provided low yields. Small time deposits also contracted, as the institutions that had been bidding aggressively for these retail funds stopped doing so. The expansion in currency remained robust. Bank credit continued to decline in January and February, and commercial and industrial (C&I) loans decreased over these months. The February Survey of Terms of Business Lending indicated that C&I loan rate spreads over comparable-maturity market instruments rose modestly overall from the November survey. Commercial real estate loans outstanding also declined over the first part of 2009. In contrast, consumer loans on banks' books jumped over the first two months of the year because of sizable increases at a few banks that purchased loans from their affiliated finance companies. In addition, some banks brought consumer loans that had previously been securitized back onto their books. After 12 consecutive months of contraction, residential mortgage loans on banks' books increased in February, likely a result of the pickup in refinancing activity. In contrast, the rise in home equity loans slowed noticeably in January and February. Among the advanced foreign economies, headline equity price indexes generally fell significantly over the period, with the sharpest drops in the banking sector. In particular, European bank shares fell steeply as earnings reports for the fourth quarter came in weaker than expected and fears about the exposure of many western European banks to emerging Europe increased. The major currencies index of the dollar rose, on net, over the intermeeting period; foremost among the contributors to the rise was a significant appreciation of the dollar against the yen. Financial conditions in emerging markets also worsened, with their exchange rates and equity prices generally falling and CDS premiums rising a bit on balance. Several foreign governments and central banks took further steps to support their financial markets and economies. The Bank of England announced its intention to purchase substantial quantities of government and corporate bonds through its Asset Purchase Facility, after which yields on long-term British gilts fell significantly. In addition, the British government launched its Asset Protection Scheme, which insured assets placed in the scheme by the Royal Bank of Scotland and Lloyds Bank. The Bank of Japan stated that it would resume purchases of equities held on banks' balance sheets, announced plans to purchase corporate bonds, and began its previously announced purchases of commercial paper. The Swiss National Bank announced that it would purchase both domestic corporate debt and foreign currency to increase liquidity. Staff Economic OutlookIn the forecast prepared for the meeting, the staff revised down its outlook for economic activity. The deterioration in labor market conditions was rapid in recent months, with steep job losses across nearly all sectors. Industrial production continued to contract rapidly as firms responded to the falloff in demand and the buildup of some inventory overhangs. The incoming data on business spending suggested that business investment in equipment and structures continued to decline. Single-family housing starts had fallen to a post-World War II low in January, and demand for new homes remained weak. Both exports and imports retreated significantly in the fourth quarter of last year and appeared headed for comparable declines this quarter. Consumer outlays showed some signs of stabilizing at a low level, with real outlays for goods outside of motor vehicles recording gains in January and February. Financial conditions overall were even less supportive of economic activity, with broad equity indexes down significantly amid continued concerns about the health of the financial sector, the dollar stronger, and long-term interest rates higher. The staff's projections for real GDP in the second half of 2009 and in 2010 were revised down, with real GDP expected to flatten out gradually over the second half of this year and then to expand slowly next year as the stresses in financial markets ease, the effects of fiscal stimulus take hold, inventory adjustments are worked through, and the correction in housing activity comes to an end. The weaker trajectory of real output resulted in the projected path of the unemployment rate rising more steeply into early next year before flattening out at a high level over the rest of the year. The staff forecast for overall and core personal consumption expenditures (PCE) inflation over the next two years was revised down slightly. Both core and overall PCE price inflation were expected to be damped by low rates of resource utilization, falling import prices, and easing cost pressures as a result of the sharp net declines in oil and other raw materials prices since last summer. Meeting Participants' Views and Committee Policy ActionIn the discussion of the economic situation and outlook, nearly all meeting participants said that conditions had deteriorated relative to their expectations at the time of the January meeting. The slowdown was widespread across sectors. Large declines in equity prices, a further drop in house prices, and mounting job losses threatened to further depress consumer spending, despite some firming in the recent retail sales data and forthcoming tax reductions. Business capital spending was weakening in an environment of uncertainty and low business confidence. Of particular note was the apparent sharp fall in foreign economic activity, which was having a negative effect on U.S. exports. Credit conditions remained very tight, and financial markets remained fragile and unsettled, with pressures on financial institutions generally intensifying this year. Overall, participants expressed concern about downside risks to an outlook for activity that was already weak. With regard to the outlook for inflation, all participants agreed that inflation pressures were likely to remain subdued, and several expressed the view that inflation was likely to persist below desirable levels. District business contacts indicated that production and sales were declining steeply. Some industries that previously were less affected, such as agriculture and energy, had begun to suffer the effects of the slowdown. Businesses reported that bank financing was becoming more expensive and more difficult to obtain. Expenditures were being cut substantially for a wide range of capital equipment, and spending on nonresidential structures had recently turned down. Inventory liquidation was continuing, but inventory-sales ratios remained elevated as sales slowed. Against this backdrop, participants anticipated further employment cutbacks over coming months, though perhaps at a gradually diminishing rate. Several participants said that the degree and pervasiveness of the decline in foreign economic activity was one of the most notable developments since the January meeting. In light of this development, it was widely agreed that exports were not likely to be a source of support for U.S. economic activity in the near term. Participants did not interpret the uptick in housing starts in February as the beginning of a new trend, but some noted that there was only limited scope for housing activity to fall further. Nonetheless, large inventories of unsold homes relative to sales and the prospect of a continued high level of distressed sales would continue to hold down residential investment in the near term. Several participants noted the tentative signs of stabilization in consumer spending in January and February. However, others suggested that strains on household balance sheets from falling equity and house prices, reduced credit availability, and the fear of unemployment could well lead to further increases in the saving rate that would damp consumption growth in the near term. Overall, most participants viewed downside risks as predominating in the near term, mainly owing to potential adverse feedback effects as reduced employment and production weighed on consumer spending and investment, and as the weakening economy boosted the prospective losses of financial institutions, leading to a further tightening of credit conditions. Looking beyond the very near term, a number of market forces and policies now in place were seen as eventually leading to economic recovery. Notably, the low level of mortgage interest rates, reduced house prices, and the Administration's new programs to encourage mortgage refinancing and mitigate foreclosures ultimately could bring about a lower cost of homeownership, a sustained increase in home sales, and a stabilization of house prices. The household saving rate, which had already risen considerably, would eventually level out and cease to hold back consumption growth. Business inventories would come into line with even a low level of sales, and the pressure on production from inventory drawdowns would diminish. Fiscal and monetary policies were likely to contribute significantly to aggregate demand in coming quarters. Participants expressed a variety of views about the strength and timing of the recovery, however. Some believed that the natural resilience of market forces would become evident later this year. Others, who saw recovery as delayed and potentially weak, were concerned about a possible further rise in the saving rate and a very slow improvement in financial conditions. Some participants also cautioned that, because of the poor functioning of the financial system, capital and labor were not being allocated to their most productive uses, and this failure threatened to damp the recovery and reduce the potential growth of the economy over the medium term. Participants saw little chance of a pickup in inflation over the near term, as rising unemployment and falling capacity utilization were holding down wages and prices and inflation expectations appeared subdued. Several expressed concern that inflation was likely to persist below desired levels, with a few pointing to the risk of deflation. Even without a continuation of outright price declines, falling expectations of inflation would raise the real rate of interest and thus increase the burden of debt and further restrain the economy. Some indicators, including share prices and CDS spreads of financial institutions, suggested a worsening of financial market strains since January. However, for the most part, participants viewed conditions in financial markets as little changed but remaining extraordinarily stressed. The large volume of issuance of investment-grade corporate bonds in recent weeks was a notable bright spot. Participants shared comments received from financial industry contacts on their experiences with and concerns about recent government programs to stabilize the financial system. These contacts feared that uncertainties about future actions the government might take and future regulations it might impose were making it more difficult to plan and were discouraging participation in government efforts to stabilize the financial system. Participants agreed that a credible and widely understood program to deal with the troubles of the banking system could help restore business and consumer confidence. Many viewed the strengthening of the banking system as essential for a sustained and robust recovery. In the discussion of monetary policy for the intermeeting period, Committee members agreed that substantial additional purchases of longer-term assets eligible for open market operations would be appropriate. Such purchases would provide further monetary stimulus to help address the very weak economic outlook and reduce the risk that inflation could persist for a time below rates that best foster longer-term economic growth and price stability. One member preferred to focus additional purchases on longer-term Treasury securities, whereas another member preferred to focus on agency MBS. However, both could support expanded purchases across a range of assets, and several members noted that working across a range of assets and instruments was appropriate when the effects of any one tactic were uncertain. Members agreed that the monetary base was likely to grow significantly as a consequence of additional asset purchases; one, in particular, stressed that sustained increases in the monetary base were important to ensure that policy was consistently expansionary. Members expressed a range of views as to the preferred size of the increase in purchases. Several members felt that the significant deterioration in the economic outlook merited a very substantial increase in purchases of longer-term assets. In contrast, the potential for a large increase over time in the size of the balance sheet from the TALF program was seen as supporting a more modest, though still substantial, increase in asset purchases. Ultimately, members agreed to undertake additional purchases of agency MBS of up to $750 billion and of agency debt of up to $100 billion, and they also agreed to purchase up to $300 billion of longer-term Treasury securities. The Committee believed that purchases of these amounts would help to promote a return to economic growth and price stability. The period for conducting the agency debt and MBS purchases was extended from the next three months to the next nine months; members agreed to allow the Desk flexibility within this horizon to respond to market conditions. Treasury purchases were to be conducted over the next six months. Members also noted the recent launch of the TALF, and they agreed to include in the Committee's statement an indication that the range of assets accepted as eligible collateral for the TALF was likely to be expanded. Committee members decided to keep the target range for the federal funds rate at 0 to 1/4 percent and to communicate to the public the Committee's view that the federal funds rate was likely to remain exceptionally low for an extended period. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to purchase GSE debt, GSE-guaranteed MBS, and longer-term Treasury securities during the intermeeting period with the aim of providing support to private credit markets and economic activity. The timing and pace of these purchases should depend on conditions in the markets for such securities and on a broader assessment of private credit market conditions. The Committee anticipates that the combination of outright purchases and various liquidity facilities outstanding will cause the size of the Federal Reserve's balance sheet to expand significantly in coming months. The Desk is expected to purchase up to $200 billion in housing-related GSE debt by the end of this year. The Desk is expected to purchase at least $500 billion in GSE-guaranteed MBS by the end of the second quarter of this year and is expected to purchase up to $1.25 trillion of these securities by the end of this year. The Committee also directs the Desk to purchase longer-term Treasury securities during the intermeeting period. Over the next six months, the Desk is expected to purchase up to $300 billion of longer-term Treasury securities. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability." The vote encompassed approval of the statement below to be released at 2:15 p.m.: "Information received since the Federal Open Market Committee met in January indicates that the economy continues to contract. Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending. Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment. U.S. exports have slumped as a number of major trading partners have also fallen into recession. Although the near-term economic outlook is weak, the Committee anticipates that policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth. In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term. In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve's balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months. The Federal Reserve has launched the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses and anticipates that the range of eligible collateral for this facility is likely to be expanded to include other financial assets. The Committee will continue to carefully monitor the size and composition of the Federal Reserve's balance sheet in light of evolving financial and economic developments." Voting for this action: Messrs. Bernanke and Dudley, Ms. Duke, Messrs. Evans, Kohn, Lacker, Lockhart, Tarullo, and Warsh, and Ms. Yellen. Voting against this action: None. It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, April 28-29, 2009. The meeting adjourned at 1:35 p.m. on March 18, 2009. Conference CallOn February 7, 2009, the Committee met by conference call in a joint session with the Board of Governors to discuss the potential role of the Federal Reserve in the Treasury's forthcoming financial stabilization plan. After hearing an overview of the version of the plan envisioned at the time of the meeting, meeting participants discussed its principal elements and shared a range of perspectives on its implications for financial markets and institutions. The Federal Reserve's primary direct role in the plan would be through an expansion of the previously announced TALF, which would be supported by additional funds from the Troubled Asset Relief Program (TARP). In the current environment, it was anticipated that such an expansion would provide additional assistance to financial markets and institutions in meeting the credit needs of households and businesses and thus would support overall economic activity. While several participants expressed some concern that the expansion of the TALF program could increase the Federal Reserve's exposure to credit risk, the program's requirements for highly rated collateral that would exceed the value of the related loans, in combination with the added TARP funds as a backstop against losses, were generally seen as providing the Federal Reserve with adequate protection. Participants also discussed the implications of the expanded TALF program for the Federal Reserve's balance sheet over time. Participants agreed it would be important to work with the Treasury to obtain tools to ensure that any reserves added to the banking system through this program could be removed at the appropriate time. Notation VoteBy notation vote completed on February 17, 2009, the Committee unanimously approved the minutes of the FOMC meeting held on January 27-28, 2009. _____________________________ Brian F. MadiganSecretary 1. Attended Tuesday's session only. 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2009-02-18

Minute

A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, January 27, 2009, at 1:30 p.m. and continued on Wednesday, January 28, 2009, at 9:00 a.m. PRESENT: Mr. Bernanke, ChairmanMr. Dudley, Vice ChairmanMs. DukeMr. EvansMr. KohnMr. LackerMr. Lockhart Mr. WarshMs. Yellen Mr. Bullard, Ms. Cumming, Mr. Hoenig, Ms. Pianalto, and Mr. Rosengren, Alternate Members of the Federal Open Market Committee Messrs. Fisher, Plosser, and Stern, Presidents of the Federal Reserve Banks of Dallas, Philadelphia, and Minneapolis, respectivelyMr. Madigan, Secretary and EconomistMs. Danker, Deputy SecretaryMr. Luecke, Assistant SecretaryMr. Skidmore, Assistant SecretaryMs. Smith, Assistant SecretaryMr. Alvarez, General Counsel Mr. Ashton,1 Assistant General CounselMr. Sheets, Economist Mr. Stockton, Economist Messrs. Altig, Clouse, Connors, Kamin, Slifman, Tracy, and Wilcox, Associate Economists Ms. Mosser, Temporary Manager, System Open Market Account Ms. Johnson,2 Secretary of the Board, Office of the Secretary, Board of Governors Mr. Frierson,2 Deputy Secretary, Office of the Secretary, Board of Governors Mr. Struckmeyer, Deputy Staff Director, Office of Staff Director for Management, Board of Governors Ms. Bailey, Deputy Director, Division of Banking Supervision and Regulation, Board of Governors Mr. English, Deputy Director, Division of Monetary Affairs, Board of Governors Mr. Blanchard, Assistant to the Board, Office of Board Members, Board of Governors Messrs. Reifschneider and Wascher, Associate Directors, Division of Research and Statistics, Board of Governors Mr. Levin, Associate Director, Division of Monetary Affairs, Board of Governors Ms. Shanks,3 Associate Secretary, Office of the Secretary, Board of Governors Mr. Reeve, Deputy Associate Director, Division of International Finance, Board of Governors Mr. Sichel, Deputy Associate Director, Division of Research and Statistics, Board of Governors Mr. Meyer, Senior Adviser, Division of Monetary Affairs, Board of Governors Mr. Oliner, Senior Adviser, Division of Research and Statistics, Board of Governors Ms. Dynan, Assistant Director, Division of Research and Statistics, Board of Governors Mr. Small, Project Manager, Division of Monetary Affairs, Board of Governors Ms. Kusko, Senior Economist, Division of Research and Statistics, Board of Governors Mr. Gust, Senior Economist, Division of International Finance, Board of Governors Messrs. Driscoll and King, Economists, Division of Monetary Affairs, Board of Governors Ms. Beattie,2 Assistant to the Secretary, Office of the Secretary, Board of Governors Ms. Low, Open Market Secretariat Specialist, Division of Monetary Affairs, Board of Governors Ms. Green, First Vice President, Federal Reserve Bank of Richmond Messrs. Fuhrer, Rosenblum, and Sniderman, Executive Vice Presidents, Federal Reserve Banks of Boston, Dallas, and Cleveland, respectively Messrs. Hilton and Krane, Mses. Mester and Perelmuter, Messrs. Rasche, Rudebusch, and Sellon, Senior Vice Presidents, Federal Reserve Banks of New York, Chicago, Philadelphia, New York, St. Louis, San Francisco, and Kansas City, respectively Mr. Weber, Senior Research Officer, Federal Reserve Bank of Minneapolis Mr. Hetzel, Senior Economist, Federal Reserve Bank of Richmond In the agenda for this meeting, it was reported that advices of the election of the following members and alternate members of the Federal Open Market Committee for a term beginning January 27, 2009, had been received and that these individuals had executed their oaths of office. The elected members and alternate members were as follows: William C. Dudley, President of the Federal Reserve Bank of New York, with Christine M. Cumming, First Vice President of the Federal Reserve Bank of New York, as alternate. Jeffrey M. Lacker, President of the Federal Reserve Bank of Richmond, with Eric C. Rosengren, President of the Federal Reserve Bank of Boston, as alternate. Charles L. Evans, President of the Federal Reserve Bank of Chicago, with Sandra Pianalto, President of the Federal Reserve Bank of Cleveland, as alternate. Dennis P. Lockhart, President of the Federal Reserve Bank of Atlanta, with James B. Bullard, President of the Federal Reserve Bank of St. Louis, as alternate. Janet L. Yellen, President of the Federal Reserve Bank of San Francisco, with Thomas M. Hoenig, President of the Federal Reserve Bank of Kansas City, as alternate. Annual Organizational MattersBy unanimous vote, the following officers of the Federal Open Market Committee were selected to serve until the selection of their successors at the first regularly scheduled meeting of the Committee in 2010: Ben S. Bernanke Chairman William C. Dudley Vice Chairman Brian F. Madigan Secretary and Economist Deborah J. Danker Deputy Secretary Matthew M. Luecke Assistant Secretary David W. Skidmore Assistant Secretary Michelle A. Smith Assistant Secretary Scott G. Alvarez General Counsel Thomas C. Baxter, Jr. Deputy General Counsel Richard M. Ashton Assistant General Counsel D. Nathan Sheets Economist David J. Stockton Economist   David E. Altig James A. Clouse Thomas A. Connors Steven B. Kamin Lawrence Slifman Daniel G. Sullivan Joseph S. Tracy John A. Weinberg David W. Wilcox John C. Williams Associate Economists By unanimous vote, the Committee adopted several minor amendments to its Program for Security of FOMC Information. By unanimous vote, the Federal Reserve Bank of New York was selected to execute transactions for the System Open Market Account. Secretary's note: The Chairman reported that prior to the meeting he had used his authority under the Committee's Rules of Organization to appoint Ms. Mosser as Manager of the System Open Market Account until the Committee selects a replacement manager. By unanimous vote, the Committee approved the Authorization for Foreign Currency Operations (shown below) with a clerical amendment that combined the list of currencies in 1.A approved at the January 2008 meeting with the five additional currencies that were approved by the Committee in September and October 2008 in connection with temporary reciprocal currency arrangements: AUTHORIZATION FOR FOREIGN CURRENCY OPERATIONS(Amended January 27, 2009) 1. The Federal Open Market Committee authorizes and directs the Federal Reserve Bank of New York, for System Open Market Account, to the extent necessary to carry out the Committee's foreign currency directive and express authorizations by the Committee pursuant thereto, and in conformity with such procedural instructions as the Committee may issue from time to time: A. To purchase and sell the following foreign currencies in the form of cable transfers through spot or forward transactions on the open market at home and abroad, including transactions with the U.S. Treasury, with the U.S. Exchange Stabilization Fund established by Section 10 of the Gold Reserve Act of 1934, with foreign monetary authorities, with the Bank for International Settlements, and with other international financial institutions: Australian dollarsBrazilian reaisCanadian dollarsDanish kronereuroJapanese yenKorean wonMexican pesosNew Zealand dollarsNorwegian kronerPounds sterlingSingapore dollarsSwedish kronorSwiss francs B. To hold balances of, and to have outstanding forward contracts to receive or to deliver, the foreign currencies listed in paragraph A above. C. To draw foreign currencies and to permit foreign banks to draw dollars under the reciprocal currency arrangements listed in paragraph 2 below, provided that drawings by either party to any such arrangement shall be fully liquidated within 12 months after any amount outstanding at that time was first drawn, unless the Committee, because of exceptional circumstances, specifically authorizes a delay. D. To maintain an overall open position in all foreign currencies not exceeding $25.0 billion. For this purpose, the overall open position in all foreign currencies is defined as the sum (disregarding signs) of net positions in individual currencies, excluding changes in dollar value due to foreign exchange rate movements and interest accruals. The net position in a single foreign currency is defined as holdings of balances in that currency, plus outstanding contracts for future receipt, minus outstanding contracts for future delivery of that currency, i.e., as the sum of these elements with due regard to sign. 2. The Federal Open Market Committee directs the Federal Reserve Bank of New York to maintain reciprocal currency arrangements ("swap" arrangements) for the System Open Market Account for periods up to a maximum of 12 months with the following foreign banks, which are among those designated by the Board of Governors of the Federal Reserve System under Section 214.5 of Regulation N, Relations with Foreign Banks and Bankers, and with the approval of the Committee to renew such arrangements on maturity: Foreign bank Amount of arrangement(millions of dollars equivalent) Bank of Canada 2,000 Bank of Mexico 3,000 Any changes in the terms of existing swap arrangements, and the proposed terms of any new arrangements that may be authorized, shall be referred for review and approval to the Committee. 3. All transactions in foreign currencies undertaken under paragraph 1.A. above shall, unless otherwise expressly authorized by the Committee, be at prevailing market rates. For the purpose of providing an investment return on System holdings of foreign currencies or for the purpose of adjusting interest rates paid or received in connection with swap drawings, transactions with foreign central banks may be undertaken at non-market exchange rates. 4. It shall be the normal practice to arrange with foreign central banks for the coordination of foreign currency transactions. In making operating arrangements with foreign central banks on System holdings of foreign currencies, the Federal Reserve Bank of New York shall not commit itself to maintain any specific balance, unless authorized by the Federal Open Market Committee. Any agreements or understandings concerning the administration of the accounts maintained by the Federal Reserve Bank of New York with the foreign banks designated by the Board of Governors under Section 214.5 of Regulation N shall be referred for review and approval to the Committee. 5. Foreign currency holdings shall be invested to ensure that adequate liquidity is maintained to meet anticipated needs and so that each currency portfolio shall generally have an average duration of no more than 18 months (calculated as Macaulay duration). Such investments may include buying or selling outright obligations of, or fully guaranteed as to principal and interest by, a foreign government or agency thereof; buying such securities under agreements for repurchase of such securities; selling such securities under agreements for the resale of such securities; and holding various time and other deposit accounts at foreign institutions. In addition, when appropriate in connection with arrangements to provide investment facilities for foreign currency holdings, U.S. Government securities may be purchased from foreign central banks under agreements for repurchase of such securities within 30 calendar days. 6. All operations undertaken pursuant to the preceding paragraphs shall be reported promptly to the Foreign Currency Subcommittee and the Committee. The Foreign Currency Subcommittee consists of the Chairman and Vice Chairman of the Committee, the Vice Chairman of the Board of Governors, and such other member of the Board as the Chairman may designate (or in the absence of members of the Board serving on the Subcommittee, other Board members designated by the Chairman as alternates, and in the absence of the Vice Chairman of the Committee, the Vice Chairman's alternate). Meetings of the Subcommittee shall be called at the request of any member, or at the request of the Manager, System Open Market Account ("Manager"), for the purposes of reviewing recent or contemplated operations and of consulting with the Manager on other matters relating to the Manager's responsibilities. At the request of any member of the Subcommittee, questions arising from such reviews and consultations shall be referred for determination to the Federal Open Market Committee. 7. The Chairman is authorized: A. With the approval of the Committee, to enter into any needed agreement or understanding with the Secretary of the Treasury about the division of responsibility for foreign currency operations between the System and the Treasury; B. To keep the Secretary of the Treasury fully advised concerning System foreign currency operations, and to consult with the Secretary on policy matters relating to foreign currency operations; C. From time to time, to transmit appropriate reports and information to the National Advisory Council on International Monetary and Financial Policies. 8. Staff officers of the Committee are authorized to transmit pertinent information on System foreign currency operations to appropriate officials of the Treasury Department. 9. All Federal Reserve Banks shall participate in the foreign currency operations for System Account in accordance with paragraph 3G(1) of the Board of Governors' Statement of Procedure with Respect to Foreign Relationships of Federal Reserve Banks dated January 1, 1944. By unanimous vote, the Foreign Currency Directive was reaffirmed in the form shown below: FOREIGN CURRENCY DIRECTIVE(Reaffirmed January 27, 2009) 1. System operations in foreign currencies shall generally be directed at countering disorderly market conditions, provided that market exchange rates for the U.S. dollar reflect actions and behavior consistent with IMF Article IV, Section 1. 2. To achieve this end the System shall: A. Undertake spot and forward purchases and sales of foreign exchange. B. Maintain reciprocal currency ("swap") arrangements with selected foreign central banks. C. Cooperate in other respects with central banks of other countries and with international monetary institutions. 3. Transactions may also be undertaken: A. To adjust System balances in light of probable future needs for currencies. B. To provide means for meeting System and Treasury commitments in particular currencies, and to facilitate operations of the Exchange Stabilization Fund. C. For such other purposes as may be expressly authorized by the Committee. 4. System foreign currency operations shall be conducted: A. In close and continuous consultation and cooperation with the United States Treasury; B. In cooperation, as appropriate, with foreign monetary authorities; and C. In a manner consistent with the obligations of the United States in the International Monetary Fund regarding exchange arrangements under IMF Article IV. By unanimous vote, the Committee approved the Procedural Instructions with Respect to Foreign Currency Operations, with the addition of the clarifying phrase "unless otherwise directed by the Committee" in the first sentence: PROCEDURAL INSTRUCTIONS WITH RESPECT TO FOREIGN CURRENCY OPERATIONS(Amended January 27, 2009) In conducting operations pursuant to the authorization and direction of the Federal Open Market Committee as set forth in the Authorization for Foreign Currency Operations and the Foreign Currency Directive, the Federal Reserve Bank of New York, through the Manager, System Open Market Account ("Manager"), shall be guided by the following procedural understandings with respect to consultations and clearances with the Committee, the Foreign Currency Subcommittee, and the Chairman of the Committee, unless otherwise directed by the Committee. All operations undertaken pursuant to such clearances shall be reported promptly to the Committee. 1. The Manager shall clear with the Subcommittee (or with the Chairman, if the Chairman believes that consultation with the Subcommittee is not feasible in the time available): A. Any operation that would result in a change in the System's overall open position in foreign currencies exceeding $300 million on any day or $600 million since the most recent regular meeting of the Committee. B. Any operation that would result in a change on any day in the System's net position in a single foreign currency exceeding $150 million, or $300 million when the operation is associated with repayment of swap drawings. C. Any operation that might generate a substantial volume of trading in a particular currency by the System, even though the change in the System's net position in that currency might be less than the limits specified in 1.B. D. Any swap drawing proposed by a foreign bank not exceeding the larger of (i) $200 million or (ii) 15 percent of the size of the swap arrangement. 2. The Manager shall clear with the Committee (or with the Subcommittee, if the Subcommittee believes that consultation with the full Committee is not feasible in the time available, or with the Chairman, if the Chairman believes that consultation with the Subcommittee is not feasible in the time available): A. Any operation that would result in a change in the System's overall open position in foreign currencies exceeding $1.5 billion since the most recent regular meeting of the Committee. B. Any swap drawing proposed by a foreign bank exceeding the larger of (i) $200 million or (ii) 15 percent of the size of the swap arrangement. 3. The Manager shall also consult with the Subcommittee or the Chairman about proposed swap drawings by the System and about any operations that are not of a routine character. By unanimous vote, the Committee approved several amendments to the Authorization for Domestic Open Market Operations (shown below). The amendments consolidate language authorizing repurchase agreements and reverse repurchase agreements into one paragraph, add a paragraph authorizing the use of agents to execute transactions in certain mortgage-backed securities (MBS), and add language to the final paragraph that reflects the Committee's current focus on using the composition and size of the Federal Reserve's balance sheet as instruments of monetary policy. The final paragraph now specifies that decisions to make material changes in the composition and size of the portfolio of assets held in the System Open Market Account during the period between meetings of the Federal Open Market Committee will be made in the same manner as decisions to change the intended level of the federal funds rate during the intermeeting period: AUTHORIZATION FOR DOMESTIC OPEN MARKET OPERATIONS(Amended January 27, 2009) 1. The Federal Open Market Committee authorizes and directs the Federal Reserve Bank of New York, to the extent necessary to carry out the most recent domestic policy directive adopted at a meeting of the Committee: A. To buy or sell U.S. Government securities, including securities of the Federal Financing Bank, and securities that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the United States in the open market, from or to securities dealers and foreign and international accounts maintained at the Federal Reserve Bank of New York, on a cash, regular, or deferred delivery basis, for the System Open Market Account at market prices, and, for such Account, to exchange maturing U.S. Government and Federal agency securities with the Treasury or the individual agencies or to allow them to mature without replacement; B. To buy or sell in the open market U.S. Government securities, and securities that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the United States, for the System Open Market Account under agreements to resell or repurchase such securities or obligations (including such transactions as are commonly referred to as repo and reverse repo transactions) in 65 business days or less, at rates that, unless otherwise expressly authorized by the Committee, shall be determined by competitive bidding, after applying reasonable limitations on the volume of agreements with individual counterparties. 2. In order to ensure the effective conduct of open market operations, the Federal Open Market Committee authorizes the Federal Reserve Bank of New York to use agents in agency MBS-related transactions. 3. In order to ensure the effective conduct of open market operations, the Federal Open Market Committee authorizes the Federal Reserve Bank of New York to lend on an overnight basis U.S. Government securities held in the System Open Market Account to dealers at rates that shall be determined by competitive bidding. The Federal Reserve Bank of New York shall set a minimum lending fee consistent with the objectives of the program and apply reasonable limitations on the total amount of a specific issue that may be auctioned and on the amount of securities that each dealer may borrow. The Federal Reserve Bank of New York may reject bids which could facilitate a dealer's ability to control a single issue as determined solely by the Federal Reserve Bank of New York. 4. In order to ensure the effective conduct of open market operations, while assisting in the provision of short-term investments for foreign and international accounts maintained at the Federal Reserve Bank of New York and accounts maintained at the Federal Reserve Bank of New York as fiscal agent of the United States pursuant to Section 15 of the Federal Reserve Act, the Federal Open Market Committee authorizes and directs the Federal Reserve Bank of New York (a) for System Open Market Account, to sell U.S. Government securities to such accounts on the bases set forth in paragraph 1.A under agreements providing for the resale by such accounts of those securities in 65 business days or less on terms comparable to those available on such transactions in the market; and (b) for New York Bank account, when appropriate, to undertake with dealers, subject to the conditions imposed on purchases and sales of securities in paragraph l.B, repurchase agreements in U.S. Government and agency securities, and to arrange corresponding sale and repurchase agreements between its own account and such foreign, international, and fiscal agency accounts maintained at the Bank. Transactions undertaken with such accounts under the provisions of this paragraph may provide for a service fee when appropriate. 5. In the execution of the Committee's decision regarding policy during any intermeeting period, the Committee authorizes and directs the Federal Reserve Bank of New York, upon the instruction of the Chairman of the Committee, to adjust somewhat in exceptional circumstances the degree of pressure on reserve positions and hence the intended federal funds rate and to take actions that result in material changes in the composition and size of the assets in the System Open Market Account other than those anticipated by the Committee at its most recent meeting. Any such adjustment shall be made in the context of the Committee's discussion and decision at its most recent meeting and the Committee's long-run objectives for price stability and sustainable economic growth, and shall be based on economic, financial, and monetary developments during the intermeeting period. Consistent with Committee practice, the Chairman, if feasible, will consult with the Committee before making any adjustment. In light of its program to purchase large quantities of agency debt and mortgage-backed securities, the Committee voted to suspend temporarily the Guidelines for the Conduct of System Operations in Federal Agency Issues (last amended January 28, 2003). Mr. Lacker dissented, stating that he views targeted purchases of agency debt and mortgage-backed securities as distorting credit markets and would prefer that the Desk instead purchase Treasury securities. The remainder of the Committee's meeting was conducted as a joint meeting with the Board of Governors in order to facilitate policy discussion of developments with regard to the System's liquidity facilities and balance sheet during the intermeeting period and to consider the need for changes in the System's approach to using those tools. Market Developments and Open Market OperationsThe Manager of the System Open Market Account reported on recent developments in domestic and foreign financial markets. The Manager also reported on System open market operations in Treasury securities and in agency debt and mortgage-backed securities during the period since the Committee's December 15-16 meeting. By unanimous vote, the Committee ratified these transactions. There were no open market operations in foreign currencies for the System's account during the period since the Committee's December 15-16 meeting. Meeting participants discussed the potential benefits of conducting open market purchases of a substantial quantity of longer-term Treasury securities for the System Open Market Account. Participants generally agreed that purchasing such securities could be a useful adjunct to other monetary policy tools in some circumstances. One participant preferred to begin purchasing Treasury securities immediately, as a way to increase the monetary base, in lieu of expanding programs that aim to support particular segments of the credit markets. Other participants were prepared to purchase longer-term Treasury securities if evolving circumstances were to indicate that such transactions would be particularly effective in improving conditions in private credit markets. However, they judged that purchases of longer-term Treasury securities would only modestly improve conditions in private credit markets at present, and that completing already-announced plans to purchase large quantities of agency debt and mortgage-backed securities and to support certain asset-backed securities markets was, in current circumstances, likely to be a more effective way to employ the Federal Reserve balance sheet to support credit flows to, and spending by, households and businesses. System Liquidity Programs and Balance SheetStaff reported on developments in System liquidity programs and on changes in the System's balance sheet since the Committee's December 15-16 meeting. As of January 26, the System's total assets and liabilities stood at just under $2 trillion, about $300 billion less than on December 17, 2008. The drop, which resulted primarily from a decline in foreign central bank drawings on reciprocal currency arrangements and a reduction in issuers' sales of commercial paper to the Commercial Paper Funding Facility (CPFF), seemed to reflect some improvement in the functioning of global interbank markets and the commercial paper market after the year-end. Most participants interpreted the evidence as indicating that credit markets still were not working well, and that the Federal Reserve's lending programs, asset purchases, and currency swaps were providing much-needed support to economic activity by reducing dislocations in financial markets, lowering the cost of credit, and facilitating the flow of credit to businesses and households. Several indicated that they expected the soon-to-be-implemented Term Asset-Backed Securities Loan Facility (TALF) to improve liquidity and reduce disruptions in the markets for securities backed by student loans, credit card receivables, auto loans, and small business loans guaranteed by the Small Business Administration; they also noted that it might become necessary to enhance or expand the TALF or other programs. However, in the view of one participant, financial markets--including those for asset-backed securities--were working reasonably well, given the current high level of pessimism and uncertainty about economic prospects and asset values, and the System's lending and asset-purchase programs were resulting in undesirable distortions in the allocation of credit. Others noted that such programs could have undesirable consequences if expanded too far or continued too long. Many participants agreed that it would be desirable for the System to develop additional measures of the effects of its programs, and they encouraged additional research on analytical frameworks that could inform Federal Reserve policy actions with respect to the size and composition of its balance sheet. Several meeting participants noted that the expansion of the Federal Reserve's balance sheet along with continued growth of the money supply could help stabilize longer-run inflation expectations in the face of increasing economic slack and very low inflation in coming quarters. Over a longer horizon, however, the Federal Reserve will need to scale back its liquidity programs and the size of its balance sheet as the economy recovers, to avoid the risk of an unwanted increase in expected inflation and a buildup of inflation pressures. Participants observed that many of the Federal Reserve's liquidity programs are priced so that they will become unattractive to borrowers as conditions in financial markets improve; these programs will shrink automatically. In other cases, the Federal Reserve eventually may have to take a more active role in scaling back programs by adjusting their terms and conditions. More generally, the Federal Reserve may need to develop additional tools to manage the size of its balance sheet and the level of the federal funds rate as the economy recovers. As of late January, however, with financial conditions strained and the economic outlook weak, most participants agreed that the Committee should continue to focus on supporting the functioning of financial markets and stimulating the economy through purchases of agency debt and mortgage-backed securities and other measures--including the implementation of the TALF--that will keep the size of the Federal Reserve's balance sheet at a high level for some time. Participants also discussed the advisability of extending the termination dates of a number of temporary liquidity facilities and reciprocal currency arrangements from April 30 to October 30, 2009. Participants generally were of the view that, despite modest improvements in some sectors, conditions in credit markets overall remained severely disrupted. Most expressed support for extending the termination dates in order to reassure market participants that the facilities would remain in place as a backstop to private-sector credit arrangements while financial conditions remained strained; they were prepared to extend the facilities beyond year-end if conditions warrant. Participants also noted that extending the termination date of these liquidity facilities to October 30 would not rule out the possibility of closing particular facilities sooner if improvements in financial conditions were to indicate they were no longer needed to support credit markets and economic activity and to help preserve price stability. Following the discussion, the Committee voted unanimously to extend the termination dates of existing reciprocal currency arrangements and the Term Securities Lending Facility (TSLF) to October 30, 2009. The Board of Governors then voted unanimously to extend the termination dates of the TSLF, the Primary Dealer Credit Facility (PDCF), the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), the CPFF, and the Money Market Investor Funding Facility (MMIFF) to October 30, 2009. Staff Review of the Economic and Financial SituationThe information reviewed at the meeting indicated a continued sharp contraction in real economic activity. Sales and starts of new homes remained on a steep downward trend, consumer spending continued its significant decline, the deterioration in business equipment investment intensified, and foreign demand weakened. Conditions in the labor market continued to deteriorate rapidly in December: Private payroll employment fell sharply, and the unemployment rate rose. Industrial production dropped more severely than in earlier months. Headline consumer prices fell in November and December, reflecting declines in consumer energy prices; core consumer prices were about flat in those months. While conditions in some financial markets showed limited improvement, extraordinary financial stresses remained apparent and credit conditions became still tighter for households and businesses. Employment continued to contract. Private nonfarm payrolls fell sharply in December, with substantial losses over a wide range of industries. Indicators of job vacancies and hiring declined further, and layoffs continued to mount. The unemployment rate increased to 7.2 percent in December, the share of individuals working part time for economic reasons surged, and the labor force participation rate edged down for a second consecutive month. In December, industrial production posted a sharp decline after falling substantially in November; the contraction was broad-based. The decrease in production of consumer goods reflected cutbacks in motor vehicle assemblies as well as in the output of consumer durable goods such as appliances, furniture, and carpeting. Output in high-tech sectors contracted in the fourth quarter, reflecting reduced production of semiconductors, communications equipment, and computers. The production of aircraft and parts recorded an increase in December after being held down in the autumn by a strike and by problems with some outsourced components. Available forward-looking indicators pointed to a further contraction in manufacturing output in coming months. Real consumer spending appeared to decline sharply again in the fourth quarter, likely reflecting the combined effects of decreases in house and equity prices, a weakening labor market, and tight credit conditions. Real spending on goods excluding motor vehicles was estimated to have fallen noticeably in December, more than reversing an increase in November. Outlays on motor vehicles edged down in November and December following a sharper decline in October. Early indicators of spending in January pointed to continued soft demand. Readings on consumer sentiment remained at very low levels by historical standards through the end of 2008 and showed little improvement in early January. Real residential construction contracted in November and December. Single-family housing starts dropped at a much faster rate in those months than they had in the first 10 months of the year. Multifamily starts also fell in those months, as did permit issuance for both categories. Housing demand remained very weak and, although the stock of unsold new single-family homes continued to move down in November, inventories of unsold homes remained elevated relative to the pace of sales. Sales of existing single-family homes dropped less than sales of new homes in November and turned up in December, but the relative strength in sales of existing homes appeared to be at least partly attributable to increases in foreclosure-related and other distressed sales. Although the interest rate on conforming 30-year fixed-rate mortgages declined markedly over the intermeeting period, the Senior Loan Officer Opinion Survey on Bank Lending Practices that was conducted in January indicated that banks had tightened lending standards on prime mortgage loans over the preceding three months. The market for nonconforming loans remained severely impaired. Several indexes indicated that house prices continued to decline rapidly. In the business sector, investment in equipment and software appeared to contract noticeably in the fourth quarter, with decreases registered in all major spending categories. In December, business purchases of autos and trucks moved down. Spending on high-tech capital goods appeared to decline in the fourth quarter. Orders and shipments for many types of equipment declined in October and November, and imports of capital goods dropped back in those months. Forward-looking indicators of investment in equipment and software pointed to likely further declines. Construction spending related to petroleum refining and power generation and distribution continued to increase briskly in the second half of 2008, responding to the surge in energy prices in the first half of that year, but real investment for many types of buildings stagnated or declined. Vacancy rates for office, retail, and industrial properties continued to move up in the fourth quarter, and the results of the January Senior Loan Officer Opinion Survey indicated that financing for new projects had become even more difficult to acquire. Real nonfarm inventories (excluding motor vehicles) appeared to have fallen in the last few months of 2008. However, with sales declining even more sharply, the ratio of book-value inventories to sales increased in October and November. The U.S. international trade deficit narrowed sharply in November, as a steep decline in imports outweighed a sizable drop in exports. Much of the fall in exports was attributable to a decline in exports of fuels, chemicals, and other industrial supplies, which in part reflected lower prices for these goods. All other major categories of exports moved down as well. More than half of the decline in imports was due to a decrease in imports of oil that mostly reflected a dramatic decrease in prices but also some reduction in volume. All other major categories of imports also recorded sizable decreases. Economic activity in the advanced foreign economies appeared to contract sharply in the fourth quarter, as the pace of job losses rose and measures of consumer spending on durable goods and business spending on investment goods showed declines. In Japan and Europe, trade and industrial production dropped steeply, and measures of consumer and business sentiment declined. In Canada, employment fell markedly in November and December after edging up in October. Incoming data suggested that economic activity in the emerging market economies slowed significantly in the fourth quarter, with real gross domestic product (GDP) plunging in several Asian economies and appearing little changed in China. Industrial production, trade, and measures of consumer sentiment registered declines across many other countries in both emerging Asia and Latin America. In the United States, overall personal consumption expenditure (PCE) prices were estimated to have fallen in December, largely reflecting significant reductions in energy prices. Increases in consumer food prices began to moderate toward the end of 2008. Excluding food and energy prices, PCE prices appeared to have decelerated over the final three months of the year. The moderation in core PCE prices was widespread across categories of goods and services. After rising rapidly during the first nine months of the year, producer prices excluding food and energy fell sharply in the last three months of 2008. Measures of longer-term inflation expectations edged up in early January, but remained lower than they had been in all but the last few weeks of 2008. In December, average hourly earnings moved up moderately. The decisions of the Federal Open Market Committee (FOMC) at its December 15-16 meeting reportedly were more aggressive than investors had been expecting. Market participants reportedly were somewhat surprised both by the size of the reduction in the target federal funds rate, to a range of 0 to 1/4 percent, and by the statements that policy rates would likely remain low for some time and that the FOMC might engage in additional nontraditional policy actions such as the purchase of longer-term Treasury securities. Over the intermeeting period, investors marked down their expectations for the path of the federal funds rate, as measured by money market futures rates. The path first moved down immediately after the December FOMC meeting. Later in the period, the policy path tilted lower in response to weaker-than-expected economic data releases and increased concerns about the health of some financial institutions. In contrast, yields on medium- and longer-term nominal Treasury coupon securities increased, on net, over the period. Yields dropped sharply following the release of the FOMC statement, reportedly in part because investors interpreted it as suggesting that the Federal Reserve might increase its holdings of longer-term Treasury securities. Those price movements were more than reversed after the turn of the year, despite the worsening economic outlook, apparently reflecting a waning of year-end safe-haven demands and an anticipation of substantially increased Treasury debt issuance to finance larger-than-expected deficits associated with the new Administration's economic stimulus plans. Although implied inflation compensation derived from Treasury Inflation-Protected Securities (TIPS) increased over the period, this increase reportedly was largely attributable to improved trading conditions in the TIPS market rather than upward revisions to inflation expectations. Conditions in short-term funding markets showed some signs of easing, although significant stresses remained. The spreads of London interbank offered rates, or Libor, over comparable-maturity overnight index swap rates declined across most maturities over the period: The one-month spread fell to its lowest level since August 2007; the three-month spread also declined but remained elevated. Though depository institutions continued to make substantial use of the discount window, the amount of primary credit outstanding declined. Recent auctions of term funds under the Federal Reserve's Term Auction Facility were undersubscribed, although one auction following the year-end did see a relatively large number of bidders. The TSLF auctions were also undersubscribed. Use of the PDCF continued to fall significantly over the period. Conditions in markets for repurchase agreements, or repos, also showed some signs of improvement. With the overnight Treasury general collateral repo rate near zero for much of the period, market participants reportedly were reluctant to lend Treasury collateral out of concern that counterparties might fail to return borrowed securities. However, the pace of delivery fails continued to run well below the high rates of September and October, reflecting in part reductions in transaction volumes as well as industry efforts to mitigate fails, including the January 5 recommendation of the Treasury Market Practices Group to implement a financial charge on settlement fails. Conditions in the market for repo transactions backed by agency debt and mortgage-backed securities also improved somewhat, with average bid-asked spreads declining from high levels. The market for Treasury coupon securities showed signs of increased impairment late in 2008, followed by some improvement early in 2009. Trading volumes fell to very low levels at the end of 2008, although they recovered a bit after the end of the year. Bid-asked spreads in the on-the-run market declined sharply at the beginning of 2009 after having increased at the end of 2008. The on-the-run premium for the 10-year nominal Treasury note was little changed at very elevated levels over the intermeeting period. On balance, the Treasury market remained much less liquid than normal.Treasury- and government-only money market mutual funds (MMMFs) faced pressures stemming from very low short-term interest rates, and many such funds reportedly had waived management fees in an effort to retain investors. By contrast, prime MMMFs had net inflows over the intermeeting period. The MMIFF continued to register no activity despite changes that eased some of the terms of the program. Market participants nonetheless pointed to the MMIFF as a potentially important backup facility. Conditions in the commercial paper (CP) market improved over the intermeeting period, likely reflecting recent measures taken in support of this market, greater demand from institutional investors, and the passing of year-end. Yields and spreads on 30-day A1/P1 nonfinancial and financial CP as well as on asset-backed commercial paper (ABCP) declined modestly and remained low. Yields and spreads on 30-day A2/P2 CP, which is not eligible for purchase under the CPFF, dropped sharply after the beginning of the year as some institutional investors reportedly reentered the market. The dollar amounts of outstanding unsecured financial and nonfinancial CP and ABCP rose slightly, on net, over the intermeeting period. This small change was more than accounted for by the increase in CP held by the CPFF. In contrast, credit extended under the AMLF declined over the intermeeting period. Liquidity in the corporate bond market improved over the intermeeting period, with increases in trading volume for both investment- and speculative-grade bonds and declines in bid-asked spreads for speculative-grade bonds. Yields and spreads on corporate bonds decreased noticeably, particularly for speculative-grade firms, but spreads remained high by historical standards. Gross issuance of bonds by nonfinancial investment-grade companies remained solid, but issuance of speculative-grade bonds was limited. Conditions in the leveraged loan market remained very poor and issuance of leveraged syndicated loans was also very weak. Secondary market prices for leveraged loans stayed near record lows and the average bid-asked spread in that market continued to be very wide. The market for commercial mortgage-backed securities (CMBS) continued to show signs of strain, with the CMBX index--an index based on credit default swap (CDS) spreads on AAA-rated CMBS--widening during the intermeeting period from already very elevated levels. Broad equity market indexes fell over the intermeeting period. After improving during the early part of the intermeeting period, market sentiment toward financial firms appeared to worsen later in the period. Those firms substantially underperformed the broader market as a number of large and regional banks reported sizable losses stemming from weak trading results, asset write-downs, and additional increases in loan-loss provisions in anticipation of a further deterioration in credit quality. CDS spreads for U.S. bank holding companies rose sharply in mid-January to near their historical highs, and equity prices for such companies fell on net, ending the period below their November lows. A number of banking organizations issued debt through the FDIC's Temporary Liquidity Guarantee Program; spreads on such debt declined to levels close to those on agency debt. The Treasury's Troubled Asset Relief Program provided additional support to several banking institutions. In particular, to support financial market stability, the Treasury, the FDIC, and the Federal Reserve announced on January 16 that they had entered into an agreement with Bank of America to provide a package of guarantees, liquidity access, and capital. Developments at nonbank financial institutions were mixed. Equity prices of insurance companies edged down over the period, while their CDS spreads declined from extremely high levels. Hedge funds posted negative average returns in December. Debt of the domestic nonfinancial sectors expanded at a somewhat faster pace in the fourth quarter of 2008 than in the first three quarters of the year. Borrowing by the federal government continued to surge, boosted by programs aimed at reducing financial market strains. Borrowing by state and local governments picked up as the conditions in municipal bond market improved somewhat. Household debt appeared to have contracted in the fourth quarter, with both mortgage and consumer credit sharply curtailed due to weak household spending and tight credit conditions. Business debt expanded only modestly, given the high cost of borrowing, tighter lending terms, and the deterioration in the macroeconomic environment. Commercial bank credit fell for the second consecutive month in December. Commercial and industrial loans declined in November and December, likely reflecting a combination of tighter credit supply and reduced loan demand as well as some unwinding of the surge during September and October. The Senior Loan Officer Opinion Survey conducted in January indicated that banks had continued to tighten credit standards and terms on all major loan categories over the past three months. Survey respondents also indicated that they had reduced the size of credit lines for a wide range of existing business and household customers. M2 expanded at a considerably more rapid pace in December than in previous months. Flows into both demand deposits and savings deposits surged, possibly reflecting a reallocation of wealth towards assets that had government insurance or guarantees. Small time deposits also increased strongly, as banks continued to bid aggressively for these deposits. Currency continued to grow briskly, apparently boosted by solid foreign demand for U.S. banknotes. In December, retail MMMF balances increased modestly after a decline in November. Conditions in foreign financial markets were relatively calm over the intermeeting period, although concerns about bank earnings and the stability of the global banking system led to widespread declines in equity prices later in the period. Governments in major foreign economies initiated several actions aimed at strengthening the banking sector and easing credit market strains. Sovereign bond yields in the advanced foreign economies fell early in the period, likely reflecting declining inflation and expectations of lower policy rates, but moved up subsequently, perhaps in response to concerns about fiscal deficits. The dollar increased on balance against the currencies of major U.S. trading partners. Staff Economic OutlookIn the forecast prepared for the meeting, the staff revised down its outlook for economic activity in the first half of 2009, as the implications of weaker-than-anticipated economic data releases more than offset an upward revision to the staff's assumption of the amount of forthcoming fiscal stimulus. Conditions in the labor market deteriorated sharply over the intermeeting period. Industrial production declined steeply, and household and business spending fell more than anticipated. Sales and starts of new homes remained on a steep downtrend. Foreign demand also was weaker than expected. Financial markets continued to be strained overall, credit remained unusually tight for both households and businesses, and equity prices had fallen further. The staff's projections of real GDP growth in the second half of 2009 and in 2010 were revised upward slightly, reflecting greater monetary and fiscal stimulus as well as the effects of more moderate oil prices and long-term interest rates, but they continued to show no more than a gradual economic recovery. The staff again expected that unemployment would rise substantially through the beginning of 2010 before edging down over the remainder of that year. Forecasts for core and overall PCE inflation in 2009 and 2010 were little changed, with growth in both core and overall PCE prices expected to be unusually low over the next few years in response to slack in resource utilization and relatively flat prices anticipated for many commodities and for imports. Meeting Participants' Views and Committee Policy ActionIn conjunction with this FOMC meeting, all meeting participants-the four members of the Board of Governors and the presidents of the twelve Federal Reserve Banks-provided projections for economic growth, the unemployment rate, and consumer price inflation for each year from 2009 through 2011. To provide the public with information about their views of likely longer-term economic trends, and as additional context for the Committee's monetary policy discussions, participants agreed to collect and publish, on a quarterly basis, projections of the longer-run values to which they expect these three variables to converge. Participants' projections through 2011, and for the longer-run, are described in the Summary of Economic Projections that is attached as an addendum to these minutes. In their discussion of the economic and financial situation and the outlook for the economy, participants agreed that the economy had weakened further going into 2009. The incoming data, as well as information received from contacts in the business and banking communities, indicated a sharp and widespread economic contraction both domestically and abroad, reflecting in large part the adverse effects of the intensification of the financial crisis and the interaction between deteriorating economic and financial conditions. Participants generally saw credit conditions as extremely tight, with financial markets fragile and some parts of the banking sector under substantial stress. However, modest signs of improvement were evident in some financial markets--particularly those that were receiving support from Federal Reserve liquidity facilities and other government actions. Participants anticipated that a gradual recovery in U.S. economic activity would begin during the third or fourth quarter of this year as the economy begins to respond to fiscal stimulus, relatively low energy prices, and continuing efforts to stabilize the financial sector and increase the availability of credit. Several participants noted that firms' efforts to control inventories as sales declined had contributed to the rapid downturn in production and employment in recent quarters, but expected that the resulting absence of widespread inventory overhangs might spur a prompt pickup in production in many sectors later this year once sales begin to level out or turn up. Headline inflation would pick up some as the effects of previous declines in oil and other commodity prices wore off. But in an environment of considerable economic slack, little if any inflation pressure from energy or other import prices, and possible declines in inflation expectations, headline and core inflation were expected to be quite low for several years. Participants were, however, quite uncertain about the outlook. All but a few saw the risks to growth as tilted to the downside; in light of financial stresses and tight credit conditions, they saw a significant risk that the economic recovery would be both delayed and initially quite weak. In particular, most participants saw the renewed deterioration in the banking sector's financial condition as posing a significant downside risk to the economic outlook absent additional initiatives to stabilize the banking system. Participants noted that consumers were continuing to cut back expenditures in response to sharply declining employment, further declines in wealth, and tighter credit conditions. Some participants mentioned that business contacts had indicated that firms were reducing payrolls aggressively and also freezing wages and salaries, further restricting growth in personal income and thus probably damping consumer spending. Looking ahead, participants anticipated that tax cuts and some other elements of the proposed fiscal stimulus package would add to after-tax incomes and thus boost consumer spending, though the magnitude of the impetus was far from clear. For example, unless the cuts were clearly perceived to be permanent, the boost to consumer spending might prove short-lived, as was the case with the tax rebates distributed in the spring of 2008. Participants saw no indication that the housing sector was beginning to stabilize. Though sales of existing homes appeared to have flattened out, a large fraction of those transactions seemed to have resulted from foreclosures or other forced sales; moreover, new home sales, housing starts, and permits all continued to decline steeply. Lower house prices and mortgage rates had increased housing affordability, but concerns that house prices may fall further appeared to be holding back potential buyers. The pace of commercial construction also had slowed. A number of participants expressed concern that the commercial real estate sector could deteriorate sharply in the months ahead. They noted that a large number of commercial real estate mortgages will come due at a time when banks likely will still be facing balance-sheet constraints, the ability to securitize commercial real estate mortgages may remain severely restricted, and vacancy rates in commercial properties could well be climbing. Some participants worried that the outcome could be an increase in defaults on commercial real estate mortgages and forced sales of commercial properties, which could push prices down further and generate additional losses on banks' commercial real estate loan portfolios. However, the commercial real estate sector had expanded more moderately during the recent expansion than during the expansion of the late 1980s, suggesting that the downturn in the current cycle could be milder than that seen in the early 1990s. Participants also noted that other categories of business investment were contracting; they expected the rapid contraction to continue in coming quarters. Equipment investment had declined particularly sharply, reflecting weak sales, tighter credit, and substantial uncertainty about future economic conditions and government policies. Lower energy and commodity prices, while supporting consumer spending, had reduced investment in oil, gas, and mineral extraction. Outside of the agricultural sector, business contacts had reported sizable cutbacks in their planned capital expenditures for 2009. State and local government budgets had come under significant pressure as the slowing economy led to declining revenues. Several participants noted that governments in their regions were responding by cutting spending rather than supplementing revenues. The fiscal stimulus bill, which was being considered by the Congress as the Committee met, would support state and local government spending as well as boost federal spending, helping to buoy demands for goods and services. Participants generally thought that fiscal stimulus was a necessary and important complement to the steps the Federal Reserve and other agencies were taking, and that it would help foster economic recovery, but had questions about the details of the proposed legislation and the extent to which it would boost demands for and production of goods and services. Participants indicated they had been surprised by the speed and magnitude of the slowdown in economic growth abroad and the resulting drop in demand for U.S. exports. It was noted that the surprisingly sharp decline in both U.S. exports and imports might also reflect tight credit conditions, including the reduced availability of trade credit. Moreover, participants did not expect foreign economies to rebound quickly, suggesting that net exports would not provide much support for U.S. economic activity in coming quarters. Participants agreed that inflation pressures had diminished appreciably in recent quarters, and they expected significantly lower headline and core inflation during the next few years than during recent years. Indeed, most anticipated that inflation will slow for a time to rates somewhat lower than those they judge consistent with the dual goals of price stability and maximum employment, initially reflecting the recent declines in the prices of energy and other commodities and later responding to several years of substantial economic slack. Many participants noted some risk of a protracted period of excessively low inflation, especially if inflation expectations were to move down in response to lower actual inflation and increasing economic slack, and a few even saw some risk of deflation. Several others, however, anticipated that longer-run inflation expectations would remain well anchored, supported in part by the Federal Reserve's aggressive expansion of its balance sheet and the resulting growth of the monetary base, and therefore thought it unlikely that inflation would decline below levels they saw as consistent with the dual goals of price stability and maximum employment. Moreover, some noted a risk that expected inflation might actually increase to an undesirably high level if the public does not understand that the Federal Reserve's liquidity facilities will be wound down and its balance sheet will shrink as economic and financial conditions improve. Several participants indicated that they thought the FOMC should explore establishing quantitative guidelines or targets for a monetary aggregate, perhaps the growth rate of the monetary base or M2; in their view such guidelines would provide useful information to the public and help anchor inflation expectations. Others were skeptical that a single quantitative measure could adequately convey the Federal Reserve's current approach to monetary policy because the stimulative effect of the Federal Reserve's liquidity-providing and asset-purchase programs depends not only on the scale but also on the mix of lending programs and securities purchases. In addition, a few participants noted that the sizes of some Federal Reserve liquidity programs are determined by banks' and market participants' need to use those programs and thus will tend to increase when financial conditions worsen and shrink when financial conditions improve; the size and composition of the Federal Reserve's balance sheet needs to be able to adjust in response. In their discussion of monetary policy for the intermeeting period, Committee members agreed that keeping the target range for the federal funds rate at 0 to 1/4 percent would be appropriate. They also agreed to continue using liquidity and asset-purchase programs to support the functioning of financial markets and stimulate the economy. Members further agreed that these programs were likely to maintain the size of the Federal Reserve's balance sheet at a high level. Members noted that it may be necessary to expand these programs, but had somewhat different views about the best way of doing so. One member expressed the view that it would be best to expand holdings of U.S. Treasury securities rather than to expand targeted liquidity programs. All other members indicated that they thought it appropriate to continue the program of purchasing agency debt and mortgage-backed securities. Several expressed a willingness to expand the size and duration of those purchases in the near future; others stood ready to expand the program if conditions warrant but noted that the program had only recently been implemented and preferred to wait for more information about economic and financial developments and the program's effects before considering an expansion. At the conclusion of the discussion, with Mr. Lacker dissenting, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to purchase GSE debt and agency-guaranteed MBS during the intermeeting period with the aim of providing support to the mortgage and housing markets. The timing and pace of these purchases should depend on conditions in the markets for such securities and on a broader assessment of conditions in primary mortgage markets and the housing sector. By the end of the second quarter of this year, the Desk is expected to purchase up to $100 billion in housing-related GSE debt and up to $500 billion in agency-guaranteed MBS. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability." The vote encompassed approval of the following statement to be released at 2:15 p.m.: "The Federal Open Market Committee decided today to keep its target range for the federal funds rate at 0 to 1/4 percent. The Committee continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time. Information received since the Committee met in December suggests that the economy has weakened further. Industrial production, housing starts, and employment have continued to decline steeply, as consumers and businesses have cut back spending. Furthermore, global demand appears to be slowing significantly. Conditions in some financial markets have improved, in part reflecting government efforts to provide liquidity and strengthen financial institutions; nevertheless, credit conditions for households and firms remain extremely tight. The Committee anticipates that a gradual recovery in economic activity will begin later this year, but the downside risks to that outlook are significant. In light of the declines in the prices of energy and other commodities in recent months and the prospects for considerable economic slack, the Committee expects that inflation pressures will remain subdued in coming quarters. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. The focus of the Committee's policy is to support the functioning of financial markets and stimulate the economy through open market operations and other measures that are likely to keep the size of the Federal Reserve's balance sheet at a high level. The Federal Reserve continues to purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand the quantity of such purchases and the duration of the purchase program as conditions warrant. The Committee also is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets. The Federal Reserve will be implementing the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Committee will continue to monitor carefully the size and composition of the Federal Reserve's balance sheet in light of evolving financial market developments and to assess whether expansions of or modifications to lending facilities would serve to further support credit markets and economic activity and help to preserve price stability." Voting for this action: Messrs. Bernanke and Dudley, Ms. Duke, Messrs. Evans, Kohn, Lockhart, and Warsh, and Ms. Yellen. Voting against this action: Mr. Lacker. Mr. Lacker dissented because he preferred to expand the monetary base by purchasing U.S. Treasury securities rather than through targeted credit programs. Mr. Lacker was fully supportive of the significant expansion of the Federal Reserve's balance sheet and the intention to maintain the size of the balance sheet at a high level. However, while he recognized that spreads were elevated and volumes low in many credit markets, he saw no evidence of market failures that made targeted credit programs, including the forthcoming TALF, necessary. Moreover, he was concerned that such programs channel credit away from other worthy borrowers, amount to fiscal policy, would exacerbate moral hazard, and might be hard to unwind. He supported, instead, maintaining the size of the balance sheet at a high level through purchases of U.S. Treasury securities. In his view, such purchases would limit distortions to private credit flows, minimize adverse incentive effects, and maintain a clear distinction between monetary and fiscal policies. It was agreed that the next meeting of the Committee would be held on Tuesday, March 17, 2009. The meeting adjourned at 1:05 p.m. on January 28, 2009. Notation VoteBy notation vote completed on January 5, 2009, the Committee unanimously approved the minutes of the FOMC meeting held on December 15-16, 2008. Conference CallOn January 16, 2009, the Committee met by conference call to discuss issues associated with establishing an explicit numerical objective for inflation. The Committee made no decisions on whether to establish such an objective. Most meeting participants expressed the view that an explicit numerical objective for longer-run inflation would be fully consistent with the Federal Reserve's dual mandate of promoting maximum employment and price stability and would not impede fostering the stability of the financial system. A number of participants emphasized that additional clarity on the longer-run inflation goal would further enhance Federal Reserve communications but would not involve any substantive change in monetary policy strategy. Many participants agreed that establishing and maintaining a transparent numerical inflation objective would be helpful--at least to some degree--in anchoring inflation expectations and thereby improve the overall effectiveness of monetary policy; others judged that the potential benefits of an explicit numerical inflation objective might be largely attained by extending the horizon of their regular projections for economic activity and inflation. Some indicated that the establishment of a numerical inflation objective could be particularly helpful under present circumstances in forestalling an unwelcome decline in longer-run inflation expectations---and hence in contributing to economic recovery--while also assuring the public that actions taken to counter economic weakness will not lead to high inflation over the longer-run. However, several participants expressed concern that an initiative to clarify the Committee's longer-run inflation objective could be confusing to the public in the current context of economic weakness and financial market strains. Participants also discussed several technical issues related to the implementation and communication of an explicit numerical inflation objective. They expressed a range of views about whether such an objective should be expressed in terms of the consumer price index or the PCE price deflator, the merits of a point value versus a range, the length of time over which policy would aim to achieve any such objective, and the frequency with which the Committee would reevaluate this framework. At this meeting, the staff also briefed the Committee on the coordinated set of measures for supporting Bank of America that had been taken by the Treasury, the FDIC, and the Federal Reserve earlier that day. _____________________________ Brian F. MadiganSecretary 1. Attended Wednesday's session only.Return to text2. Attended portion of the meeting that was a joint session of the Board and the FOMC. Return to text3. Attended portion of the meeting on Tuesday that was a joint session of the Board and the FOMC. Return to text Return to top

2009-01-28

Statement

The Federal Open Market Committee decided today to keep its target range for the federal funds rate at 0 to 1/4 percent. The Committee continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time. Information received since the Committee met in December suggests that the economy has weakened further. Industrial production, housing starts, and employment have continued to decline steeply, as consumers and businesses have cut back spending. Furthermore, global demand appears to be slowing significantly. Conditions in some financial markets have improved, in part reflecting government efforts to provide liquidity and strengthen financial institutions; nevertheless, credit conditions for households and firms remain extremely tight. The Committee anticipates that a gradual recovery in economic activity will begin later this year, but the downside risks to that outlook are significant. In light of the declines in the prices of energy and other commodities in recent months and the prospects for considerable economic slack, the Committee expects that inflation pressures will remain subdued in coming quarters. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term. The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. The focus of the Committee's policy is to support the functioning of financial markets and stimulate the economy through open market operations and other measures that are likely to keep the size of the Federal Reserve's balance sheet at a high level. The Federal Reserve continues to purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand the quantity of such purchases and the duration of the purchase program as conditions warrant. The Committee also is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets. The Federal Reserve will be implementing the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Committee will continue to monitor carefully the size and composition of the Federal Reserve's balance sheet in light of evolving financial market developments and to assess whether expansions of or modifications to lending facilities would serve to further support credit markets and economic activity and help to preserve price stability. Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Dennis P. Lockhart; Kevin M. Warsh; and Janet L. Yellen.  Voting against was Jeffrey M. Lacker, who preferred to expand the monetary base at this time by purchasing U.S. Treasury securities rather than through targeted credit programs.

N/A

Minute

A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, January 27, 2009, at 1:30 p.m. and continued on Wednesday, January 28, 2009, at 9:00 a.m. PRESENT: Mr. Bernanke, ChairmanMr. Dudley, Vice ChairmanMs. DukeMr. EvansMr. KohnMr. LackerMr. Lockhart Mr. WarshMs. Yellen Mr. Bullard, Ms. Cumming, Mr. Hoenig, Ms. Pianalto, and Mr. Rosengren, Alternate Members of the Federal Open Market Committee Messrs. Fisher, Plosser, and Stern, Presidents of the Federal Reserve Banks of Dallas, Philadelphia, and Minneapolis, respectivelyMr. Madigan, Secretary and EconomistMs. Danker, Deputy SecretaryMr. Luecke, Assistant SecretaryMr. Skidmore, Assistant SecretaryMs. Smith, Assistant SecretaryMr. Alvarez, General Counsel Mr. Ashton,1 Assistant General CounselMr. Sheets, Economist Mr. Stockton, Economist Messrs. Altig, Clouse, Connors, Kamin, Slifman, Tracy, and Wilcox, Associate Economists Ms. Mosser, Temporary Manager, System Open Market Account Ms. Johnson,2 Secretary of the Board, Office of the Secretary, Board of Governors Mr. Frierson,2 Deputy Secretary, Office of the Secretary, Board of Governors Mr. Struckmeyer, Deputy Staff Director, Office of Staff Director for Management, Board of Governors Ms. Bailey, Deputy Director, Division of Banking Supervision and Regulation, Board of Governors Mr. English, Deputy Director, Division of Monetary Affairs, Board of Governors Mr. Blanchard, Assistant to the Board, Office of Board Members, Board of Governors Messrs. Reifschneider and Wascher, Associate Directors, Division of Research and Statistics, Board of Governors Mr. Levin, Associate Director, Division of Monetary Affairs, Board of Governors Ms. Shanks,3 Associate Secretary, Office of the Secretary, Board of Governors Mr. Reeve, Deputy Associate Director, Division of International Finance, Board of Governors Mr. Sichel, Deputy Associate Director, Division of Research and Statistics, Board of Governors Mr. Meyer, Senior Adviser, Division of Monetary Affairs, Board of Governors Mr. Oliner, Senior Adviser, Division of Research and Statistics, Board of Governors Ms. Dynan, Assistant Director, Division of Research and Statistics, Board of Governors Mr. Small, Project Manager, Division of Monetary Affairs, Board of Governors Ms. Kusko, Senior Economist, Division of Research and Statistics, Board of Governors Mr. Gust, Senior Economist, Division of International Finance, Board of Governors Messrs. Driscoll and King, Economists, Division of Monetary Affairs, Board of Governors Ms. Beattie,2 Assistant to the Secretary, Office of the Secretary, Board of Governors Ms. Low, Open Market Secretariat Specialist, Division of Monetary Affairs, Board of Governors Ms. Green, First Vice President, Federal Reserve Bank of Richmond Messrs. Fuhrer, Rosenblum, and Sniderman, Executive Vice Presidents, Federal Reserve Banks of Boston, Dallas, and Cleveland, respectively Messrs. Hilton and Krane, Mses. Mester and Perelmuter, Messrs. Rasche, Rudebusch, and Sellon, Senior Vice Presidents, Federal Reserve Banks of New York, Chicago, Philadelphia, New York, St. Louis, San Francisco, and Kansas City, respectively Mr. Weber, Senior Research Officer, Federal Reserve Bank of Minneapolis Mr. Hetzel, Senior Economist, Federal Reserve Bank of Richmond In the agenda for this meeting, it was reported that advices of the election of the following members and alternate members of the Federal Open Market Committee for a term beginning January 27, 2009, had been received and that these individuals had executed their oaths of office. The elected members and alternate members were as follows: William C. Dudley, President of the Federal Reserve Bank of New York, with Christine M. Cumming, First Vice President of the Federal Reserve Bank of New York, as alternate. Jeffrey M. Lacker, President of the Federal Reserve Bank of Richmond, with Eric C. Rosengren, President of the Federal Reserve Bank of Boston, as alternate. Charles L. Evans, President of the Federal Reserve Bank of Chicago, with Sandra Pianalto, President of the Federal Reserve Bank of Cleveland, as alternate. Dennis P. Lockhart, President of the Federal Reserve Bank of Atlanta, with James B. Bullard, President of the Federal Reserve Bank of St. Louis, as alternate. Janet L. Yellen, President of the Federal Reserve Bank of San Francisco, with Thomas M. Hoenig, President of the Federal Reserve Bank of Kansas City, as alternate. Annual Organizational MattersBy unanimous vote, the following officers of the Federal Open Market Committee were selected to serve until the selection of their successors at the first regularly scheduled meeting of the Committee in 2010: Ben S. Bernanke Chairman William C. Dudley Vice Chairman Brian F. Madigan Secretary and Economist Deborah J. Danker Deputy Secretary Matthew M. Luecke Assistant Secretary David W. Skidmore Assistant Secretary Michelle A. Smith Assistant Secretary Scott G. Alvarez General Counsel Thomas C. Baxter, Jr. Deputy General Counsel Richard M. Ashton Assistant General Counsel D. Nathan Sheets Economist David J. Stockton Economist   David E. Altig James A. Clouse Thomas A. Connors Steven B. Kamin Lawrence Slifman Daniel G. Sullivan Joseph S. Tracy John A. Weinberg David W. Wilcox John C. Williams Associate Economists By unanimous vote, the Committee adopted several minor amendments to its Program for Security of FOMC Information. By unanimous vote, the Federal Reserve Bank of New York was selected to execute transactions for the System Open Market Account. Secretary's note: The Chairman reported that prior to the meeting he had used his authority under the Committee's Rules of Organization to appoint Ms. Mosser as Manager of the System Open Market Account until the Committee selects a replacement manager. By unanimous vote, the Committee approved the Authorization for Foreign Currency Operations (shown below) with a clerical amendment that combined the list of currencies in 1.A approved at the January 2008 meeting with the five additional currencies that were approved by the Committee in September and October 2008 in connection with temporary reciprocal currency arrangements: AUTHORIZATION FOR FOREIGN CURRENCY OPERATIONS(Amended January 27, 2009) 1. The Federal Open Market Committee authorizes and directs the Federal Reserve Bank of New York, for System Open Market Account, to the extent necessary to carry out the Committee's foreign currency directive and express authorizations by the Committee pursuant thereto, and in conformity with such procedural instructions as the Committee may issue from time to time: A. To purchase and sell the following foreign currencies in the form of cable transfers through spot or forward transactions on the open market at home and abroad, including transactions with the U.S. Treasury, with the U.S. Exchange Stabilization Fund established by Section 10 of the Gold Reserve Act of 1934, with foreign monetary authorities, with the Bank for International Settlements, and with other international financial institutions: Australian dollarsBrazilian reaisCanadian dollarsDanish kronereuroJapanese yenKorean wonMexican pesosNew Zealand dollarsNorwegian kronerPounds sterlingSingapore dollarsSwedish kronorSwiss francs B. To hold balances of, and to have outstanding forward contracts to receive or to deliver, the foreign currencies listed in paragraph A above. C. To draw foreign currencies and to permit foreign banks to draw dollars under the reciprocal currency arrangements listed in paragraph 2 below, provided that drawings by either party to any such arrangement shall be fully liquidated within 12 months after any amount outstanding at that time was first drawn, unless the Committee, because of exceptional circumstances, specifically authorizes a delay. D. To maintain an overall open position in all foreign currencies not exceeding $25.0 billion. For this purpose, the overall open position in all foreign currencies is defined as the sum (disregarding signs) of net positions in individual currencies, excluding changes in dollar value due to foreign exchange rate movements and interest accruals. The net position in a single foreign currency is defined as holdings of balances in that currency, plus outstanding contracts for future receipt, minus outstanding contracts for future delivery of that currency, i.e., as the sum of these elements with due regard to sign. 2. The Federal Open Market Committee directs the Federal Reserve Bank of New York to maintain reciprocal currency arrangements ("swap" arrangements) for the System Open Market Account for periods up to a maximum of 12 months with the following foreign banks, which are among those designated by the Board of Governors of the Federal Reserve System under Section 214.5 of Regulation N, Relations with Foreign Banks and Bankers, and with the approval of the Committee to renew such arrangements on maturity: Foreign bank Amount of arrangement(millions of dollars equivalent) Bank of Canada 2,000 Bank of Mexico 3,000 Any changes in the terms of existing swap arrangements, and the proposed terms of any new arrangements that may be authorized, shall be referred for review and approval to the Committee. 3. All transactions in foreign currencies undertaken under paragraph 1.A. above shall, unless otherwise expressly authorized by the Committee, be at prevailing market rates. For the purpose of providing an investment return on System holdings of foreign currencies or for the purpose of adjusting interest rates paid or received in connection with swap drawings, transactions with foreign central banks may be undertaken at non-market exchange rates. 4. It shall be the normal practice to arrange with foreign central banks for the coordination of foreign currency transactions. In making operating arrangements with foreign central banks on System holdings of foreign currencies, the Federal Reserve Bank of New York shall not commit itself to maintain any specific balance, unless authorized by the Federal Open Market Committee. Any agreements or understandings concerning the administration of the accounts maintained by the Federal Reserve Bank of New York with the foreign banks designated by the Board of Governors under Section 214.5 of Regulation N shall be referred for review and approval to the Committee. 5. Foreign currency holdings shall be invested to ensure that adequate liquidity is maintained to meet anticipated needs and so that each currency portfolio shall generally have an average duration of no more than 18 months (calculated as Macaulay duration). Such investments may include buying or selling outright obligations of, or fully guaranteed as to principal and interest by, a foreign government or agency thereof; buying such securities under agreements for repurchase of such securities; selling such securities under agreements for the resale of such securities; and holding various time and other deposit accounts at foreign institutions. In addition, when appropriate in connection with arrangements to provide investment facilities for foreign currency holdings, U.S. Government securities may be purchased from foreign central banks under agreements for repurchase of such securities within 30 calendar days. 6. All operations undertaken pursuant to the preceding paragraphs shall be reported promptly to the Foreign Currency Subcommittee and the Committee. The Foreign Currency Subcommittee consists of the Chairman and Vice Chairman of the Committee, the Vice Chairman of the Board of Governors, and such other member of the Board as the Chairman may designate (or in the absence of members of the Board serving on the Subcommittee, other Board members designated by the Chairman as alternates, and in the absence of the Vice Chairman of the Committee, the Vice Chairman's alternate). Meetings of the Subcommittee shall be called at the request of any member, or at the request of the Manager, System Open Market Account ("Manager"), for the purposes of reviewing recent or contemplated operations and of consulting with the Manager on other matters relating to the Manager's responsibilities. At the request of any member of the Subcommittee, questions arising from such reviews and consultations shall be referred for determination to the Federal Open Market Committee. 7. The Chairman is authorized: A. With the approval of the Committee, to enter into any needed agreement or understanding with the Secretary of the Treasury about the division of responsibility for foreign currency operations between the System and the Treasury; B. To keep the Secretary of the Treasury fully advised concerning System foreign currency operations, and to consult with the Secretary on policy matters relating to foreign currency operations; C. From time to time, to transmit appropriate reports and information to the National Advisory Council on International Monetary and Financial Policies. 8. Staff officers of the Committee are authorized to transmit pertinent information on System foreign currency operations to appropriate officials of the Treasury Department. 9. All Federal Reserve Banks shall participate in the foreign currency operations for System Account in accordance with paragraph 3G(1) of the Board of Governors' Statement of Procedure with Respect to Foreign Relationships of Federal Reserve Banks dated January 1, 1944. By unanimous vote, the Foreign Currency Directive was reaffirmed in the form shown below: FOREIGN CURRENCY DIRECTIVE(Reaffirmed January 27, 2009) 1. System operations in foreign currencies shall generally be directed at countering disorderly market conditions, provided that market exchange rates for the U.S. dollar reflect actions and behavior consistent with IMF Article IV, Section 1. 2. To achieve this end the System shall: A. Undertake spot and forward purchases and sales of foreign exchange. B. Maintain reciprocal currency ("swap") arrangements with selected foreign central banks. C. Cooperate in other respects with central banks of other countries and with international monetary institutions. 3. Transactions may also be undertaken: A. To adjust System balances in light of probable future needs for currencies. B. To provide means for meeting System and Treasury commitments in particular currencies, and to facilitate operations of the Exchange Stabilization Fund. C. For such other purposes as may be expressly authorized by the Committee. 4. System foreign currency operations shall be conducted: A. In close and continuous consultation and cooperation with the United States Treasury; B. In cooperation, as appropriate, with foreign monetary authorities; and C. In a manner consistent with the obligations of the United States in the International Monetary Fund regarding exchange arrangements under IMF Article IV. By unanimous vote, the Committee approved the Procedural Instructions with Respect to Foreign Currency Operations, with the addition of the clarifying phrase "unless otherwise directed by the Committee" in the first sentence: PROCEDURAL INSTRUCTIONS WITH RESPECT TO FOREIGN CURRENCY OPERATIONS(Amended January 27, 2009) In conducting operations pursuant to the authorization and direction of the Federal Open Market Committee as set forth in the Authorization for Foreign Currency Operations and the Foreign Currency Directive, the Federal Reserve Bank of New York, through the Manager, System Open Market Account ("Manager"), shall be guided by the following procedural understandings with respect to consultations and clearances with the Committee, the Foreign Currency Subcommittee, and the Chairman of the Committee, unless otherwise directed by the Committee. All operations undertaken pursuant to such clearances shall be reported promptly to the Committee. 1. The Manager shall clear with the Subcommittee (or with the Chairman, if the Chairman believes that consultation with the Subcommittee is not feasible in the time available): A. Any operation that would result in a change in the System's overall open position in foreign currencies exceeding $300 million on any day or $600 million since the most recent regular meeting of the Committee. B. Any operation that would result in a change on any day in the System's net position in a single foreign currency exceeding $150 million, or $300 million when the operation is associated with repayment of swap drawings. C. Any operation that might generate a substantial volume of trading in a particular currency by the System, even though the change in the System's net position in that currency might be less than the limits specified in 1.B. D. Any swap drawing proposed by a foreign bank not exceeding the larger of (i) $200 million or (ii) 15 percent of the size of the swap arrangement. 2. The Manager shall clear with the Committee (or with the Subcommittee, if the Subcommittee believes that consultation with the full Committee is not feasible in the time available, or with the Chairman, if the Chairman believes that consultation with the Subcommittee is not feasible in the time available): A. Any operation that would result in a change in the System's overall open position in foreign currencies exceeding $1.5 billion since the most recent regular meeting of the Committee. B. Any swap drawing proposed by a foreign bank exceeding the larger of (i) $200 million or (ii) 15 percent of the size of the swap arrangement. 3. The Manager shall also consult with the Subcommittee or the Chairman about proposed swap drawings by the System and about any operations that are not of a routine character. By unanimous vote, the Committee approved several amendments to the Authorization for Domestic Open Market Operations (shown below). The amendments consolidate language authorizing repurchase agreements and reverse repurchase agreements into one paragraph, add a paragraph authorizing the use of agents to execute transactions in certain mortgage-backed securities (MBS), and add language to the final paragraph that reflects the Committee's current focus on using the composition and size of the Federal Reserve's balance sheet as instruments of monetary policy. The final paragraph now specifies that decisions to make material changes in the composition and size of the portfolio of assets held in the System Open Market Account during the period between meetings of the Federal Open Market Committee will be made in the same manner as decisions to change the intended level of the federal funds rate during the intermeeting period: AUTHORIZATION FOR DOMESTIC OPEN MARKET OPERATIONS(Amended January 27, 2009) 1. The Federal Open Market Committee authorizes and directs the Federal Reserve Bank of New York, to the extent necessary to carry out the most recent domestic policy directive adopted at a meeting of the Committee: A. To buy or sell U.S. Government securities, including securities of the Federal Financing Bank, and securities that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the United States in the open market, from or to securities dealers and foreign and international accounts maintained at the Federal Reserve Bank of New York, on a cash, regular, or deferred delivery basis, for the System Open Market Account at market prices, and, for such Account, to exchange maturing U.S. Government and Federal agency securities with the Treasury or the individual agencies or to allow them to mature without replacement; B. To buy or sell in the open market U.S. Government securities, and securities that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the United States, for the System Open Market Account under agreements to resell or repurchase such securities or obligations (including such transactions as are commonly referred to as repo and reverse repo transactions) in 65 business days or less, at rates that, unless otherwise expressly authorized by the Committee, shall be determined by competitive bidding, after applying reasonable limitations on the volume of agreements with individual counterparties. 2. In order to ensure the effective conduct of open market operations, the Federal Open Market Committee authorizes the Federal Reserve Bank of New York to use agents in agency MBS-related transactions. 3. In order to ensure the effective conduct of open market operations, the Federal Open Market Committee authorizes the Federal Reserve Bank of New York to lend on an overnight basis U.S. Government securities held in the System Open Market Account to dealers at rates that shall be determined by competitive bidding. The Federal Reserve Bank of New York shall set a minimum lending fee consistent with the objectives of the program and apply reasonable limitations on the total amount of a specific issue that may be auctioned and on the amount of securities that each dealer may borrow. The Federal Reserve Bank of New York may reject bids which could facilitate a dealer's ability to control a single issue as determined solely by the Federal Reserve Bank of New York. 4. In order to ensure the effective conduct of open market operations, while assisting in the provision of short-term investments for foreign and international accounts maintained at the Federal Reserve Bank of New York and accounts maintained at the Federal Reserve Bank of New York as fiscal agent of the United States pursuant to Section 15 of the Federal Reserve Act, the Federal Open Market Committee authorizes and directs the Federal Reserve Bank of New York (a) for System Open Market Account, to sell U.S. Government securities to such accounts on the bases set forth in paragraph 1.A under agreements providing for the resale by such accounts of those securities in 65 business days or less on terms comparable to those available on such transactions in the market; and (b) for New York Bank account, when appropriate, to undertake with dealers, subject to the conditions imposed on purchases and sales of securities in paragraph l.B, repurchase agreements in U.S. Government and agency securities, and to arrange corresponding sale and repurchase agreements between its own account and such foreign, international, and fiscal agency accounts maintained at the Bank. Transactions undertaken with such accounts under the provisions of this paragraph may provide for a service fee when appropriate. 5. In the execution of the Committee's decision regarding policy during any intermeeting period, the Committee authorizes and directs the Federal Reserve Bank of New York, upon the instruction of the Chairman of the Committee, to adjust somewhat in exceptional circumstances the degree of pressure on reserve positions and hence the intended federal funds rate and to take actions that result in material changes in the composition and size of the assets in the System Open Market Account other than those anticipated by the Committee at its most recent meeting. Any such adjustment shall be made in the context of the Committee's discussion and decision at its most recent meeting and the Committee's long-run objectives for price stability and sustainable economic growth, and shall be based on economic, financial, and monetary developments during the intermeeting period. Consistent with Committee practice, the Chairman, if feasible, will consult with the Committee before making any adjustment. In light of its program to purchase large quantities of agency debt and mortgage-backed securities, the Committee voted to suspend temporarily the Guidelines for the Conduct of System Operations in Federal Agency Issues (last amended January 28, 2003). Mr. Lacker dissented, stating that he views targeted purchases of agency debt and mortgage-backed securities as distorting credit markets and would prefer that the Desk instead purchase Treasury securities. The remainder of the Committee's meeting was conducted as a joint meeting with the Board of Governors in order to facilitate policy discussion of developments with regard to the System's liquidity facilities and balance sheet during the intermeeting period and to consider the need for changes in the System's approach to using those tools. Market Developments and Open Market OperationsThe Manager of the System Open Market Account reported on recent developments in domestic and foreign financial markets. The Manager also reported on System open market operations in Treasury securities and in agency debt and mortgage-backed securities during the period since the Committee's December 15-16 meeting. By unanimous vote, the Committee ratified these transactions. There were no open market operations in foreign currencies for the System's account during the period since the Committee's December 15-16 meeting. Meeting participants discussed the potential benefits of conducting open market purchases of a substantial quantity of longer-term Treasury securities for the System Open Market Account. Participants generally agreed that purchasing such securities could be a useful adjunct to other monetary policy tools in some circumstances. One participant preferred to begin purchasing Treasury securities immediately, as a way to increase the monetary base, in lieu of expanding programs that aim to support particular segments of the credit markets. Other participants were prepared to purchase longer-term Treasury securities if evolving circumstances were to indicate that such transactions would be particularly effective in improving conditions in private credit markets. However, they judged that purchases of longer-term Treasury securities would only modestly improve conditions in private credit markets at present, and that completing already-announced plans to purchase large quantities of agency debt and mortgage-backed securities and to support certain asset-backed securities markets was, in current circumstances, likely to be a more effective way to employ the Federal Reserve balance sheet to support credit flows to, and spending by, households and businesses. System Liquidity Programs and Balance SheetStaff reported on developments in System liquidity programs and on changes in the System's balance sheet since the Committee's December 15-16 meeting. As of January 26, the System's total assets and liabilities stood at just under $2 trillion, about $300 billion less than on December 17, 2008. The drop, which resulted primarily from a decline in foreign central bank drawings on reciprocal currency arrangements and a reduction in issuers' sales of commercial paper to the Commercial Paper Funding Facility (CPFF), seemed to reflect some improvement in the functioning of global interbank markets and the commercial paper market after the year-end. Most participants interpreted the evidence as indicating that credit markets still were not working well, and that the Federal Reserve's lending programs, asset purchases, and currency swaps were providing much-needed support to economic activity by reducing dislocations in financial markets, lowering the cost of credit, and facilitating the flow of credit to businesses and households. Several indicated that they expected the soon-to-be-implemented Term Asset-Backed Securities Loan Facility (TALF) to improve liquidity and reduce disruptions in the markets for securities backed by student loans, credit card receivables, auto loans, and small business loans guaranteed by the Small Business Administration; they also noted that it might become necessary to enhance or expand the TALF or other programs. However, in the view of one participant, financial markets--including those for asset-backed securities--were working reasonably well, given the current high level of pessimism and uncertainty about economic prospects and asset values, and the System's lending and asset-purchase programs were resulting in undesirable distortions in the allocation of credit. Others noted that such programs could have undesirable consequences if expanded too far or continued too long. Many participants agreed that it would be desirable for the System to develop additional measures of the effects of its programs, and they encouraged additional research on analytical frameworks that could inform Federal Reserve policy actions with respect to the size and composition of its balance sheet. Several meeting participants noted that the expansion of the Federal Reserve's balance sheet along with continued growth of the money supply could help stabilize longer-run inflation expectations in the face of increasing economic slack and very low inflation in coming quarters. Over a longer horizon, however, the Federal Reserve will need to scale back its liquidity programs and the size of its balance sheet as the economy recovers, to avoid the risk of an unwanted increase in expected inflation and a buildup of inflation pressures. Participants observed that many of the Federal Reserve's liquidity programs are priced so that they will become unattractive to borrowers as conditions in financial markets improve; these programs will shrink automatically. In other cases, the Federal Reserve eventually may have to take a more active role in scaling back programs by adjusting their terms and conditions. More generally, the Federal Reserve may need to develop additional tools to manage the size of its balance sheet and the level of the federal funds rate as the economy recovers. As of late January, however, with financial conditions strained and the economic outlook weak, most participants agreed that the Committee should continue to focus on supporting the functioning of financial markets and stimulating the economy through purchases of agency debt and mortgage-backed securities and other measures--including the implementation of the TALF--that will keep the size of the Federal Reserve's balance sheet at a high level for some time. Participants also discussed the advisability of extending the termination dates of a number of temporary liquidity facilities and reciprocal currency arrangements from April 30 to October 30, 2009. Participants generally were of the view that, despite modest improvements in some sectors, conditions in credit markets overall remained severely disrupted. Most expressed support for extending the termination dates in order to reassure market participants that the facilities would remain in place as a backstop to private-sector credit arrangements while financial conditions remained strained; they were prepared to extend the facilities beyond year-end if conditions warrant. Participants also noted that extending the termination date of these liquidity facilities to October 30 would not rule out the possibility of closing particular facilities sooner if improvements in financial conditions were to indicate they were no longer needed to support credit markets and economic activity and to help preserve price stability. Following the discussion, the Committee voted unanimously to extend the termination dates of existing reciprocal currency arrangements and the Term Securities Lending Facility (TSLF) to October 30, 2009. The Board of Governors then voted unanimously to extend the termination dates of the TSLF, the Primary Dealer Credit Facility (PDCF), the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), the CPFF, and the Money Market Investor Funding Facility (MMIFF) to October 30, 2009. Staff Review of the Economic and Financial SituationThe information reviewed at the meeting indicated a continued sharp contraction in real economic activity. Sales and starts of new homes remained on a steep downward trend, consumer spending continued its significant decline, the deterioration in business equipment investment intensified, and foreign demand weakened. Conditions in the labor market continued to deteriorate rapidly in December: Private payroll employment fell sharply, and the unemployment rate rose. Industrial production dropped more severely than in earlier months. Headline consumer prices fell in November and December, reflecting declines in consumer energy prices; core consumer prices were about flat in those months. While conditions in some financial markets showed limited improvement, extraordinary financial stresses remained apparent and credit conditions became still tighter for households and businesses. Employment continued to contract. Private nonfarm payrolls fell sharply in December, with substantial losses over a wide range of industries. Indicators of job vacancies and hiring declined further, and layoffs continued to mount. The unemployment rate increased to 7.2 percent in December, the share of individuals working part time for economic reasons surged, and the labor force participation rate edged down for a second consecutive month. In December, industrial production posted a sharp decline after falling substantially in November; the contraction was broad-based. The decrease in production of consumer goods reflected cutbacks in motor vehicle assemblies as well as in the output of consumer durable goods such as appliances, furniture, and carpeting. Output in high-tech sectors contracted in the fourth quarter, reflecting reduced production of semiconductors, communications equipment, and computers. The production of aircraft and parts recorded an increase in December after being held down in the autumn by a strike and by problems with some outsourced components. Available forward-looking indicators pointed to a further contraction in manufacturing output in coming months. Real consumer spending appeared to decline sharply again in the fourth quarter, likely reflecting the combined effects of decreases in house and equity prices, a weakening labor market, and tight credit conditions. Real spending on goods excluding motor vehicles was estimated to have fallen noticeably in December, more than reversing an increase in November. Outlays on motor vehicles edged down in November and December following a sharper decline in October. Early indicators of spending in January pointed to continued soft demand. Readings on consumer sentiment remained at very low levels by historical standards through the end of 2008 and showed little improvement in early January. Real residential construction contracted in November and December. Single-family housing starts dropped at a much faster rate in those months than they had in the first 10 months of the year. Multifamily starts also fell in those months, as did permit issuance for both categories. Housing demand remained very weak and, although the stock of unsold new single-family homes continued to move down in November, inventories of unsold homes remained elevated relative to the pace of sales. Sales of existing single-family homes dropped less than sales of new homes in November and turned up in December, but the relative strength in sales of existing homes appeared to be at least partly attributable to increases in foreclosure-related and other distressed sales. Although the interest rate on conforming 30-year fixed-rate mortgages declined markedly over the intermeeting period, the Senior Loan Officer Opinion Survey on Bank Lending Practices that was conducted in January indicated that banks had tightened lending standards on prime mortgage loans over the preceding three months. The market for nonconforming loans remained severely impaired. Several indexes indicated that house prices continued to decline rapidly. In the business sector, investment in equipment and software appeared to contract noticeably in the fourth quarter, with decreases registered in all major spending categories. In December, business purchases of autos and trucks moved down. Spending on high-tech capital goods appeared to decline in the fourth quarter. Orders and shipments for many types of equipment declined in October and November, and imports of capital goods dropped back in those months. Forward-looking indicators of investment in equipment and software pointed to likely further declines. Construction spending related to petroleum refining and power generation and distribution continued to increase briskly in the second half of 2008, responding to the surge in energy prices in the first half of that year, but real investment for many types of buildings stagnated or declined. Vacancy rates for office, retail, and industrial properties continued to move up in the fourth quarter, and the results of the January Senior Loan Officer Opinion Survey indicated that financing for new projects had become even more difficult to acquire. Real nonfarm inventories (excluding motor vehicles) appeared to have fallen in the last few months of 2008. However, with sales declining even more sharply, the ratio of book-value inventories to sales increased in October and November. The U.S. international trade deficit narrowed sharply in November, as a steep decline in imports outweighed a sizable drop in exports. Much of the fall in exports was attributable to a decline in exports of fuels, chemicals, and other industrial supplies, which in part reflected lower prices for these goods. All other major categories of exports moved down as well. More than half of the decline in imports was due to a decrease in imports of oil that mostly reflected a dramatic decrease in prices but also some reduction in volume. All other major categories of imports also recorded sizable decreases. Economic activity in the advanced foreign economies appeared to contract sharply in the fourth quarter, as the pace of job losses rose and measures of consumer spending on durable goods and business spending on investment goods showed declines. In Japan and Europe, trade and industrial production dropped steeply, and measures of consumer and business sentiment declined. In Canada, employment fell markedly in November and December after edging up in October. Incoming data suggested that economic activity in the emerging market economies slowed significantly in the fourth quarter, with real gross domestic product (GDP) plunging in several Asian economies and appearing little changed in China. Industrial production, trade, and measures of consumer sentiment registered declines across many other countries in both emerging Asia and Latin America. In the United States, overall personal consumption expenditure (PCE) prices were estimated to have fallen in December, largely reflecting significant reductions in energy prices. Increases in consumer food prices began to moderate toward the end of 2008. Excluding food and energy prices, PCE prices appeared to have decelerated over the final three months of the year. The moderation in core PCE prices was widespread across categories of goods and services. After rising rapidly during the first nine months of the year, producer prices excluding food and energy fell sharply in the last three months of 2008. Measures of longer-term inflation expectations edged up in early January, but remained lower than they had been in all but the last few weeks of 2008. In December, average hourly earnings moved up moderately. The decisions of the Federal Open Market Committee (FOMC) at its December 15-16 meeting reportedly were more aggressive than investors had been expecting. Market participants reportedly were somewhat surprised both by the size of the reduction in the target federal funds rate, to a range of 0 to 1/4 percent, and by the statements that policy rates would likely remain low for some time and that the FOMC might engage in additional nontraditional policy actions such as the purchase of longer-term Treasury securities. Over the intermeeting period, investors marked down their expectations for the path of the federal funds rate, as measured by money market futures rates. The path first moved down immediately after the December FOMC meeting. Later in the period, the policy path tilted lower in response to weaker-than-expected economic data releases and increased concerns about the health of some financial institutions. In contrast, yields on medium- and longer-term nominal Treasury coupon securities increased, on net, over the period. Yields dropped sharply following the release of the FOMC statement, reportedly in part because investors interpreted it as suggesting that the Federal Reserve might increase its holdings of longer-term Treasury securities. Those price movements were more than reversed after the turn of the year, despite the worsening economic outlook, apparently reflecting a waning of year-end safe-haven demands and an anticipation of substantially increased Treasury debt issuance to finance larger-than-expected deficits associated with the new Administration's economic stimulus plans. Although implied inflation compensation derived from Treasury Inflation-Protected Securities (TIPS) increased over the period, this increase reportedly was largely attributable to improved trading conditions in the TIPS market rather than upward revisions to inflation expectations. Conditions in short-term funding markets showed some signs of easing, although significant stresses remained. The spreads of London interbank offered rates, or Libor, over comparable-maturity overnight index swap rates declined across most maturities over the period: The one-month spread fell to its lowest level since August 2007; the three-month spread also declined but remained elevated. Though depository institutions continued to make substantial use of the discount window, the amount of primary credit outstanding declined. Recent auctions of term funds under the Federal Reserve's Term Auction Facility were undersubscribed, although one auction following the year-end did see a relatively large number of bidders. The TSLF auctions were also undersubscribed. Use of the PDCF continued to fall significantly over the period. Conditions in markets for repurchase agreements, or repos, also showed some signs of improvement. With the overnight Treasury general collateral repo rate near zero for much of the period, market participants reportedly were reluctant to lend Treasury collateral out of concern that counterparties might fail to return borrowed securities. However, the pace of delivery fails continued to run well below the high rates of September and October, reflecting in part reductions in transaction volumes as well as industry efforts to mitigate fails, including the January 5 recommendation of the Treasury Market Practices Group to implement a financial charge on settlement fails. Conditions in the market for repo transactions backed by agency debt and mortgage-backed securities also improved somewhat, with average bid-asked spreads declining from high levels. The market for Treasury coupon securities showed signs of increased impairment late in 2008, followed by some improvement early in 2009. Trading volumes fell to very low levels at the end of 2008, although they recovered a bit after the end of the year. Bid-asked spreads in the on-the-run market declined sharply at the beginning of 2009 after having increased at the end of 2008. The on-the-run premium for the 10-year nominal Treasury note was little changed at very elevated levels over the intermeeting period. On balance, the Treasury market remained much less liquid than normal.Treasury- and government-only money market mutual funds (MMMFs) faced pressures stemming from very low short-term interest rates, and many such funds reportedly had waived management fees in an effort to retain investors. By contrast, prime MMMFs had net inflows over the intermeeting period. The MMIFF continued to register no activity despite changes that eased some of the terms of the program. Market participants nonetheless pointed to the MMIFF as a potentially important backup facility. Conditions in the commercial paper (CP) market improved over the intermeeting period, likely reflecting recent measures taken in support of this market, greater demand from institutional investors, and the passing of year-end. Yields and spreads on 30-day A1/P1 nonfinancial and financial CP as well as on asset-backed commercial paper (ABCP) declined modestly and remained low. Yields and spreads on 30-day A2/P2 CP, which is not eligible for purchase under the CPFF, dropped sharply after the beginning of the year as some institutional investors reportedly reentered the market. The dollar amounts of outstanding unsecured financial and nonfinancial CP and ABCP rose slightly, on net, over the intermeeting period. This small change was more than accounted for by the increase in CP held by the CPFF. In contrast, credit extended under the AMLF declined over the intermeeting period. Liquidity in the corporate bond market improved over the intermeeting period, with increases in trading volume for both investment- and speculative-grade bonds and declines in bid-asked spreads for speculative-grade bonds. Yields and spreads on corporate bonds decreased noticeably, particularly for speculative-grade firms, but spreads remained high by historical standards. Gross issuance of bonds by nonfinancial investment-grade companies remained solid, but issuance of speculative-grade bonds was limited. Conditions in the leveraged loan market remained very poor and issuance of leveraged syndicated loans was also very weak. Secondary market prices for leveraged loans stayed near record lows and the average bid-asked spread in that market continued to be very wide. The market for commercial mortgage-backed securities (CMBS) continued to show signs of strain, with the CMBX index--an index based on credit default swap (CDS) spreads on AAA-rated CMBS--widening during the intermeeting period from already very elevated levels. Broad equity market indexes fell over the intermeeting period. After improving during the early part of the intermeeting period, market sentiment toward financial firms appeared to worsen later in the period. Those firms substantially underperformed the broader market as a number of large and regional banks reported sizable losses stemming from weak trading results, asset write-downs, and additional increases in loan-loss provisions in anticipation of a further deterioration in credit quality. CDS spreads for U.S. bank holding companies rose sharply in mid-January to near their historical highs, and equity prices for such companies fell on net, ending the period below their November lows. A number of banking organizations issued debt through the FDIC's Temporary Liquidity Guarantee Program; spreads on such debt declined to levels close to those on agency debt. The Treasury's Troubled Asset Relief Program provided additional support to several banking institutions. In particular, to support financial market stability, the Treasury, the FDIC, and the Federal Reserve announced on January 16 that they had entered into an agreement with Bank of America to provide a package of guarantees, liquidity access, and capital. Developments at nonbank financial institutions were mixed. Equity prices of insurance companies edged down over the period, while their CDS spreads declined from extremely high levels. Hedge funds posted negative average returns in December. Debt of the domestic nonfinancial sectors expanded at a somewhat faster pace in the fourth quarter of 2008 than in the first three quarters of the year. Borrowing by the federal government continued to surge, boosted by programs aimed at reducing financial market strains. Borrowing by state and local governments picked up as the conditions in municipal bond market improved somewhat. Household debt appeared to have contracted in the fourth quarter, with both mortgage and consumer credit sharply curtailed due to weak household spending and tight credit conditions. Business debt expanded only modestly, given the high cost of borrowing, tighter lending terms, and the deterioration in the macroeconomic environment. Commercial bank credit fell for the second consecutive month in December. Commercial and industrial loans declined in November and December, likely reflecting a combination of tighter credit supply and reduced loan demand as well as some unwinding of the surge during September and October. The Senior Loan Officer Opinion Survey conducted in January indicated that banks had continued to tighten credit standards and terms on all major loan categories over the past three months. Survey respondents also indicated that they had reduced the size of credit lines for a wide range of existing business and household customers. M2 expanded at a considerably more rapid pace in December than in previous months. Flows into both demand deposits and savings deposits surged, possibly reflecting a reallocation of wealth towards assets that had government insurance or guarantees. Small time deposits also increased strongly, as banks continued to bid aggressively for these deposits. Currency continued to grow briskly, apparently boosted by solid foreign demand for U.S. banknotes. In December, retail MMMF balances increased modestly after a decline in November. Conditions in foreign financial markets were relatively calm over the intermeeting period, although concerns about bank earnings and the stability of the global banking system led to widespread declines in equity prices later in the period. Governments in major foreign economies initiated several actions aimed at strengthening the banking sector and easing credit market strains. Sovereign bond yields in the advanced foreign economies fell early in the period, likely reflecting declining inflation and expectations of lower policy rates, but moved up subsequently, perhaps in response to concerns about fiscal deficits. The dollar increased on balance against the currencies of major U.S. trading partners. Staff Economic OutlookIn the forecast prepared for the meeting, the staff revised down its outlook for economic activity in the first half of 2009, as the implications of weaker-than-anticipated economic data releases more than offset an upward revision to the staff's assumption of the amount of forthcoming fiscal stimulus. Conditions in the labor market deteriorated sharply over the intermeeting period. Industrial production declined steeply, and household and business spending fell more than anticipated. Sales and starts of new homes remained on a steep downtrend. Foreign demand also was weaker than expected. Financial markets continued to be strained overall, credit remained unusually tight for both households and businesses, and equity prices had fallen further. The staff's projections of real GDP growth in the second half of 2009 and in 2010 were revised upward slightly, reflecting greater monetary and fiscal stimulus as well as the effects of more moderate oil prices and long-term interest rates, but they continued to show no more than a gradual economic recovery. The staff again expected that unemployment would rise substantially through the beginning of 2010 before edging down over the remainder of that year. Forecasts for core and overall PCE inflation in 2009 and 2010 were little changed, with growth in both core and overall PCE prices expected to be unusually low over the next few years in response to slack in resource utilization and relatively flat prices anticipated for many commodities and for imports. Meeting Participants' Views and Committee Policy ActionIn conjunction with this FOMC meeting, all meeting participants-the four members of the Board of Governors and the presidents of the twelve Federal Reserve Banks-provided projections for economic growth, the unemployment rate, and consumer price inflation for each year from 2009 through 2011. To provide the public with information about their views of likely longer-term economic trends, and as additional context for the Committee's monetary policy discussions, participants agreed to collect and publish, on a quarterly basis, projections of the longer-run values to which they expect these three variables to converge. Participants' projections through 2011, and for the longer-run, are described in the Summary of Economic Projections that is attached as an addendum to these minutes. In their discussion of the economic and financial situation and the outlook for the economy, participants agreed that the economy had weakened further going into 2009. The incoming data, as well as information received from contacts in the business and banking communities, indicated a sharp and widespread economic contraction both domestically and abroad, reflecting in large part the adverse effects of the intensification of the financial crisis and the interaction between deteriorating economic and financial conditions. Participants generally saw credit conditions as extremely tight, with financial markets fragile and some parts of the banking sector under substantial stress. However, modest signs of improvement were evident in some financial markets--particularly those that were receiving support from Federal Reserve liquidity facilities and other government actions. Participants anticipated that a gradual recovery in U.S. economic activity would begin during the third or fourth quarter of this year as the economy begins to respond to fiscal stimulus, relatively low energy prices, and continuing efforts to stabilize the financial sector and increase the availability of credit. Several participants noted that firms' efforts to control inventories as sales declined had contributed to the rapid downturn in production and employment in recent quarters, but expected that the resulting absence of widespread inventory overhangs might spur a prompt pickup in production in many sectors later this year once sales begin to level out or turn up. Headline inflation would pick up some as the effects of previous declines in oil and other commodity prices wore off. But in an environment of considerable economic slack, little if any inflation pressure from energy or other import prices, and possible declines in inflation expectations, headline and core inflation were expected to be quite low for several years. Participants were, however, quite uncertain about the outlook. All but a few saw the risks to growth as tilted to the downside; in light of financial stresses and tight credit conditions, they saw a significant risk that the economic recovery would be both delayed and initially quite weak. In particular, most participants saw the renewed deterioration in the banking sector's financial condition as posing a significant downside risk to the economic outlook absent additional initiatives to stabilize the banking system. Participants noted that consumers were continuing to cut back expenditures in response to sharply declining employment, further declines in wealth, and tighter credit conditions. Some participants mentioned that business contacts had indicated that firms were reducing payrolls aggressively and also freezing wages and salaries, further restricting growth in personal income and thus probably damping consumer spending. Looking ahead, participants anticipated that tax cuts and some other elements of the proposed fiscal stimulus package would add to after-tax incomes and thus boost consumer spending, though the magnitude of the impetus was far from clear. For example, unless the cuts were clearly perceived to be permanent, the boost to consumer spending might prove short-lived, as was the case with the tax rebates distributed in the spring of 2008. Participants saw no indication that the housing sector was beginning to stabilize. Though sales of existing homes appeared to have flattened out, a large fraction of those transactions seemed to have resulted from foreclosures or other forced sales; moreover, new home sales, housing starts, and permits all continued to decline steeply. Lower house prices and mortgage rates had increased housing affordability, but concerns that house prices may fall further appeared to be holding back potential buyers. The pace of commercial construction also had slowed. A number of participants expressed concern that the commercial real estate sector could deteriorate sharply in the months ahead. They noted that a large number of commercial real estate mortgages will come due at a time when banks likely will still be facing balance-sheet constraints, the ability to securitize commercial real estate mortgages may remain severely restricted, and vacancy rates in commercial properties could well be climbing. Some participants worried that the outcome could be an increase in defaults on commercial real estate mortgages and forced sales of commercial properties, which could push prices down further and generate additional losses on banks' commercial real estate loan portfolios. However, the commercial real estate sector had expanded more moderately during the recent expansion than during the expansion of the late 1980s, suggesting that the downturn in the current cycle could be milder than that seen in the early 1990s. Participants also noted that other categories of business investment were contracting; they expected the rapid contraction to continue in coming quarters. Equipment investment had declined particularly sharply, reflecting weak sales, tighter credit, and substantial uncertainty about future economic conditions and government policies. Lower energy and commodity prices, while supporting consumer spending, had reduced investment in oil, gas, and mineral extraction. Outside of the agricultural sector, business contacts had reported sizable cutbacks in their planned capital expenditures for 2009. State and local government budgets had come under significant pressure as the slowing economy led to declining revenues. Several participants noted that governments in their regions were responding by cutting spending rather than supplementing revenues. The fiscal stimulus bill, which was being considered by the Congress as the Committee met, would support state and local government spending as well as boost federal spending, helping to buoy demands for goods and services. Participants generally thought that fiscal stimulus was a necessary and important complement to the steps the Federal Reserve and other agencies were taking, and that it would help foster economic recovery, but had questions about the details of the proposed legislation and the extent to which it would boost demands for and production of goods and services. Participants indicated they had been surprised by the speed and magnitude of the slowdown in economic growth abroad and the resulting drop in demand for U.S. exports. It was noted that the surprisingly sharp decline in both U.S. exports and imports might also reflect tight credit conditions, including the reduced availability of trade credit. Moreover, participants did not expect foreign economies to rebound quickly, suggesting that net exports would not provide much support for U.S. economic activity in coming quarters. Participants agreed that inflation pressures had diminished appreciably in recent quarters, and they expected significantly lower headline and core inflation during the next few years than during recent years. Indeed, most anticipated that inflation will slow for a time to rates somewhat lower than those they judge consistent with the dual goals of price stability and maximum employment, initially reflecting the recent declines in the prices of energy and other commodities and later responding to several years of substantial economic slack. Many participants noted some risk of a protracted period of excessively low inflation, especially if inflation expectations were to move down in response to lower actual inflation and increasing economic slack, and a few even saw some risk of deflation. Several others, however, anticipated that longer-run inflation expectations would remain well anchored, supported in part by the Federal Reserve's aggressive expansion of its balance sheet and the resulting growth of the monetary base, and therefore thought it unlikely that inflation would decline below levels they saw as consistent with the dual goals of price stability and maximum employment. Moreover, some noted a risk that expected inflation might actually increase to an undesirably high level if the public does not understand that the Federal Reserve's liquidity facilities will be wound down and its balance sheet will shrink as economic and financial conditions improve. Several participants indicated that they thought the FOMC should explore establishing quantitative guidelines or targets for a monetary aggregate, perhaps the growth rate of the monetary base or M2; in their view such guidelines would provide useful information to the public and help anchor inflation expectations. Others were skeptical that a single quantitative measure could adequately convey the Federal Reserve's current approach to monetary policy because the stimulative effect of the Federal Reserve's liquidity-providing and asset-purchase programs depends not only on the scale but also on the mix of lending programs and securities purchases. In addition, a few participants noted that the sizes of some Federal Reserve liquidity programs are determined by banks' and market participants' need to use those programs and thus will tend to increase when financial conditions worsen and shrink when financial conditions improve; the size and composition of the Federal Reserve's balance sheet needs to be able to adjust in response. In their discussion of monetary policy for the intermeeting period, Committee members agreed that keeping the target range for the federal funds rate at 0 to 1/4 percent would be appropriate. They also agreed to continue using liquidity and asset-purchase programs to support the functioning of financial markets and stimulate the economy. Members further agreed that these programs were likely to maintain the size of the Federal Reserve's balance sheet at a high level. Members noted that it may be necessary to expand these programs, but had somewhat different views about the best way of doing so. One member expressed the view that it would be best to expand holdings of U.S. Treasury securities rather than to expand targeted liquidity programs. All other members indicated that they thought it appropriate to continue the program of purchasing agency debt and mortgage-backed securities. Several expressed a willingness to expand the size and duration of those purchases in the near future; others stood ready to expand the program if conditions warrant but noted that the program had only recently been implemented and preferred to wait for more information about economic and financial developments and the program's effects before considering an expansion. At the conclusion of the discussion, with Mr. Lacker dissenting, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to purchase GSE debt and agency-guaranteed MBS during the intermeeting period with the aim of providing support to the mortgage and housing markets. The timing and pace of these purchases should depend on conditions in the markets for such securities and on a broader assessment of conditions in primary mortgage markets and the housing sector. By the end of the second quarter of this year, the Desk is expected to purchase up to $100 billion in housing-related GSE debt and up to $500 billion in agency-guaranteed MBS. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability." The vote encompassed approval of the following statement to be released at 2:15 p.m.: "The Federal Open Market Committee decided today to keep its target range for the federal funds rate at 0 to 1/4 percent. The Committee continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time. Information received since the Committee met in December suggests that the economy has weakened further. Industrial production, housing starts, and employment have continued to decline steeply, as consumers and businesses have cut back spending. Furthermore, global demand appears to be slowing significantly. Conditions in some financial markets have improved, in part reflecting government efforts to provide liquidity and strengthen financial institutions; nevertheless, credit conditions for households and firms remain extremely tight. The Committee anticipates that a gradual recovery in economic activity will begin later this year, but the downside risks to that outlook are significant. In light of the declines in the prices of energy and other commodities in recent months and the prospects for considerable economic slack, the Committee expects that inflation pressures will remain subdued in coming quarters. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. The focus of the Committee's policy is to support the functioning of financial markets and stimulate the economy through open market operations and other measures that are likely to keep the size of the Federal Reserve's balance sheet at a high level. The Federal Reserve continues to purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand the quantity of such purchases and the duration of the purchase program as conditions warrant. The Committee also is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets. The Federal Reserve will be implementing the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Committee will continue to monitor carefully the size and composition of the Federal Reserve's balance sheet in light of evolving financial market developments and to assess whether expansions of or modifications to lending facilities would serve to further support credit markets and economic activity and help to preserve price stability." Voting for this action: Messrs. Bernanke and Dudley, Ms. Duke, Messrs. Evans, Kohn, Lockhart, and Warsh, and Ms. Yellen. Voting against this action: Mr. Lacker. Mr. Lacker dissented because he preferred to expand the monetary base by purchasing U.S. Treasury securities rather than through targeted credit programs. Mr. Lacker was fully supportive of the significant expansion of the Federal Reserve's balance sheet and the intention to maintain the size of the balance sheet at a high level. However, while he recognized that spreads were elevated and volumes low in many credit markets, he saw no evidence of market failures that made targeted credit programs, including the forthcoming TALF, necessary. Moreover, he was concerned that such programs channel credit away from other worthy borrowers, amount to fiscal policy, would exacerbate moral hazard, and might be hard to unwind. He supported, instead, maintaining the size of the balance sheet at a high level through purchases of U.S. Treasury securities. In his view, such purchases would limit distortions to private credit flows, minimize adverse incentive effects, and maintain a clear distinction between monetary and fiscal policies. It was agreed that the next meeting of the Committee would be held on Tuesday, March 17, 2009. The meeting adjourned at 1:05 p.m. on January 28, 2009. Notation VoteBy notation vote completed on January 5, 2009, the Committee unanimously approved the minutes of the FOMC meeting held on December 15-16, 2008. Conference CallOn January 16, 2009, the Committee met by conference call to discuss issues associated with establishing an explicit numerical objective for inflation. The Committee made no decisions on whether to establish such an objective. Most meeting participants expressed the view that an explicit numerical objective for longer-run inflation would be fully consistent with the Federal Reserve's dual mandate of promoting maximum employment and price stability and would not impede fostering the stability of the financial system. A number of participants emphasized that additional clarity on the longer-run inflation goal would further enhance Federal Reserve communications but would not involve any substantive change in monetary policy strategy. Many participants agreed that establishing and maintaining a transparent numerical inflation objective would be helpful--at least to some degree--in anchoring inflation expectations and thereby improve the overall effectiveness of monetary policy; others judged that the potential benefits of an explicit numerical inflation objective might be largely attained by extending the horizon of their regular projections for economic activity and inflation. Some indicated that the establishment of a numerical inflation objective could be particularly helpful under present circumstances in forestalling an unwelcome decline in longer-run inflation expectations---and hence in contributing to economic recovery--while also assuring the public that actions taken to counter economic weakness will not lead to high inflation over the longer-run. However, several participants expressed concern that an initiative to clarify the Committee's longer-run inflation objective could be confusing to the public in the current context of economic weakness and financial market strains. Participants also discussed several technical issues related to the implementation and communication of an explicit numerical inflation objective. They expressed a range of views about whether such an objective should be expressed in terms of the consumer price index or the PCE price deflator, the merits of a point value versus a range, the length of time over which policy would aim to achieve any such objective, and the frequency with which the Committee would reevaluate this framework. At this meeting, the staff also briefed the Committee on the coordinated set of measures for supporting Bank of America that had been taken by the Treasury, the FDIC, and the Federal Reserve earlier that day. _____________________________ Brian F. MadiganSecretary 1. Attended Wednesday's session only.Return to text2. Attended portion of the meeting that was a joint session of the Board and the FOMC. Return to text3. Attended portion of the meeting on Tuesday that was a joint session of the Board and the FOMC. Return to text Return to top

2009-01-06

Minute

A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Monday, December 15, 2008 at 2:00 p.m. and continued on Tuesday, December 16, 2008 at 9:00 a.m. PRESENT:Mr. Bernanke, ChairmanMs. DukeMr. FisherMr. KohnMr. KrosznerMs. Pianalto Mr. PlosserMr. SternMr. Warsh Ms. Cumming, Messrs. Evans, Lacker, and Lockhart, and Ms. Yellen, Alternate Members of the Federal Open Market Committee Messrs. Bullard, Hoenig, and Rosengren, Presidents of the Federal Reserve Banks of St. Louis, Kansas City, and Boston, respectively Mr. Madigan, Secretary and EconomistMs. Danker, Deputy SecretaryMr. Skidmore, Assistant SecretaryMs. Smith, Assistant SecretaryMr. Alvarez, General CounselMr. Ashton,1 Assistant General CounselMr. Sheets, Economist Mr. Stockton, Economist Messrs. Connors, English, and Kamin, Ms. Mester, Messrs. Rolnick, Rosenblum, Slifman, and Wilcox, Associate Economists Mr. Dudley, Manager, System Open Market Account Mr. Cole, Director, Division of Banking Supervision and Regulation, Board of Governors Ms. Johnson,2 Secretary, Office of the Secretary, Board of Governors Mr. Struckmeyer, Deputy Staff Director, Office of Staff Director for Management, Board of Governors Mr. Blanchard, Assistant to the Board, Office of Board Members, Board of Governors Messrs. Clouse and Parkinson,1 Deputy Directors, Divisions of Monetary Affairs and Research and Statistics, respectively, Board of Governors Mr. Frierson,2 Deputy Secretary, Office of the Secretary, Board of Governors Messrs. Leahy,2 Nelson,3 Reifschneider, and Wascher, Associate Directors, Divisions of International Finance, Monetary Affairs, Research and Statistics, and Research and Statistics, respectively, Board of Governors Mr. Gagnon,2 Visiting Associate Director, Division of Monetary Affairs, Board of Governors Ms. Shanks,2 Associate Secretary, Office of the Secretary, Board of Governors Messrs. Perli and Reeve, Deputy Associate Directors, Divisions of Monetary Affair and International Finance, respectively, Board of Governors Mr. Covitz, Assistant Director, Division of Research and Statistics, Board of Governors Ms. Goldberg,2 Visiting Reserve Bank Officer, Division of International Finance, Board of Governors Mr. Zakrajsek,2 Assistant Director, Division of Monetary Affairs, Board of Governors Messrs. Meyer2 and Oliner, Senior Advisers, Divisions of Monetary Affairs and Research and Statistics, respectively, Board of Governors Mr. Small, Project Manager, Division of Monetary Affairs, Board of Governors Messrs. Ahmed and Luecke, Section Chiefs, Divisions of International Finance and Monetary Affairs, respectively, Board of Governors Ms. Aaronson, Senior Economist, Division of Research and Statistics, Board of Governors Messrs. Gapen and McCabe,2 Economists, Divisions of Monetary Affairs and Research and Statistics, respectively, Board of Governors Ms. Beattie,2 Assistant to the Secretary, Office of the Secretary, Board of Governors Ms. Low, Open Market Secretariat Specialist, Division of Monetary Affairs, Board of Governors Mr. Werkema, First Vice President, Federal Reserve Bank of Chicago Mr. Fuhrer, Executive Vice President, Federal Reserve Bank of Boston Messrs. Altig, Hilton, Potter, Rasche, Rudebusch, Schweitzer, Sellon, Sullivan, and Weinberg, Senior Vice Presidents, Federal Reserve Banks of Atlanta, New York, New York, St. Louis, San Francisco, Cleveland, Kansas City, Chicago, and Richmond, respectively Mr. Burke,2 Assistant Vice President, Federal Reserve Bank of New York Mr. Eggertsson,2 Senior Economist, Federal Reserve Bank of New York The Manager of the System Open Market Account reported on recent developments in foreign exchange markets. There were no open market operations in foreign currencies for the System's account in the period since the previous meeting. The Manager also reported on developments in domestic financial markets and on System open market operations in government securities and federal agency obligations during the period since the previous meeting. By unanimous vote, the Committee ratified these transactions. The information reviewed at the December meeting pointed to a significant contraction in economic activity in the fourth quarter. Conditions in the labor market deteriorated considerably in recent months as most major industry groups shed jobs. Private payrolls continued to fall at a faster pace than earlier in the year, and the unemployment rate rose to 6.7 percent. Industrial production, excluding special hurricane- and strike-related effects, fell further in November, and consumer spending declined across a broad range of spending categories over recent months. The housing market weakened again as construction activity, new home sales, and home prices declined further. In the business sector, investment in equipment and software appeared to continue to contract. Financial markets saw a further pullback in risk-taking, spurred in part by the more pessimistic outlook for economic activity; this situation led to lower equity prices, higher risk spreads, and tighter constraints in credit markets, all of which intensified the decline in real activity. On the inflation front, headline consumer prices declined in recent months, as energy prices continued to fall and consumer food price increases moderated. The labor market continued to worsen. According to the November employment report, payroll employment fell at a rapid pace over the preceding three months, with substantial losses across a wide range of industry groups, including manufacturing, construction, retail, financial activities, and business services. Indicators of hiring plans also dropped steeply in November, and other labor market indicators suggested that jobs remained in short supply. The unemployment rate climbed to 6.7 percent in November, while the labor force participation rate fell after remaining steady for much of the year. New claims for unemployment insurance rose sharply through early December. Industrial production, excluding special hurricane- and strike-related effects, fell markedly in November after sizable declines in the preceding two months. The recent contraction in industrial output was broadly based. The steep pace of decline in the production of consumer goods reflected not only cutbacks in motor vehicle assemblies but also drops in the output of other goods, such as appliances, furniture, and products related to home improvement. The production of business equipment was held down by declines in the output of both industrial and high-tech equipment. The output of construction supplies extended its decline after a brief pause in the middle of the year, and the contraction in the production of materials intensified. In particular, steel production plummeted, and the output of organic chemicals contracted noticeably. For most major industry groups, factory utilization rates declined relative to their levels in July and remained below their long-run averages. Available forward-looking indicators pointed to a significant downturn in manufacturing output in coming months. Real personal consumption expenditures (PCE) fell for the fifth straight month in October, with the slowdown evident in nearly all broad spending categories. Sales of light motor vehicles, which slumped in October, fell further in November, but the available information on retail sales suggested a small increase in real outlays for other consumer goods. The annualized three-month change in spending on services in October was just one-third of the rate registered in the first half of 2008. Preliminary data for October and November suggested that overall fourth-quarter real spending would receive a modest boost from recent price declines for gasoline. Real incomes were also boosted by the reversal in energy prices, though the negative wealth effects of continued declines in equity and house prices likely offset this somewhat. Measures of consumer sentiment released in November and December remained low, and available evidence suggested further tightening in consumer credit conditions in recent months. Real construction activity continued to decline in November. Single-family housing starts and permit issuance fell further. In the multifamily sector, starts dropped sharply in November while permit issuance remained on a downtrend. Housing demand remained weak, and although the number of unsold new single-family homes continued to move lower, inventories remained elevated relative to the current pace of sales. Sales of existing single-family homes changed little, although a drop in pending home sales in October pointed to further declines in the near term. The comparative strength of existing home sales appeared to be attributable partly to increases in foreclosure-related and other distressed sales. Financing conditions for prime borrowers appeared to ease slightly after the Federal Reserve's announcement that it would purchase agency debt and agency mortgage-backed securities (MBS) to support mortgage financing, while the market for nonconforming loans remained impaired. Several indexes indicated that house prices continued to decline substantially. In the business sector, investment in equipment and software appeared to be contracting at a faster rate in the fourth quarter than during the third quarter. While the decline in the previous quarter was concentrated in computers and transportation equipment, declines in spending in the fourth quarter were more widespread. Shipments of nondefense capital goods excluding aircraft fell in October, and orders continued to decline sharply. Investment demand seemed to be weighed down by weak fundamentals and increased uncertainty about the state of the economy, while prospects for future investment activity reflected in surveys of business conditions and sentiment worsened in recent months. In addition, credit conditions remained tight. Real nonresidential investment declined in the third quarter after nearly three years of robust expansion, and nominal expenditures edged down further in October. Vacancy rates rose and property values fell in the first three quarters of the year. Real nonfarm inventories (excluding motor vehicles), which had dropped noticeably in the second quarter, fell again in the third quarter. The book value of manufacturing and wholesale trade inventories (excluding motor vehicles) showed a further drawdown in October. However, the ratio of these inventories to sales increased noticeably in September and October. The purchasing managers survey for November indicated that many purchasing agents saw their customers' inventories as too high. The U.S. international trade deficit widened in October, as a fall in imports was more than offset by a significant decline in exports. Much of the decline in exports was the result of drops in agricultural goods and industrial supplies, which largely reflected a decrease in the prices of these goods. The decline in imports was led by lower imports of non-oil industrial supplies, capital goods, and automotive products, although these declines were partly offset by an increase in the value of oil imports. Economic activity in most advanced foreign economies contracted in the third quarter, driven by sharp declines in investment and by significant negative contributions of net exports, as the global recession took hold more strongly. Incoming data pointed to an even weaker pace of activity in the fourth quarter. In Canada, however, real gross domestic product (GDP) increased at a faster-than-expected pace in the third quarter, though consumption and investment continued to soften. In the euro area and the United Kingdom, purchasing managers indexes fell in November to levels associated with severe contractions in economic activity. Labor market conditions in the advanced economies deteriorated further, with most countries experiencing rising unemployment rates. In Japan, real GDP fell in the third quarter as domestic demand declined and private investment fell for the second consecutive quarter. After peaking in the third quarter, consumer price inflation moderated in all advanced foreign economies, primarily as a result of falling energy and food prices. Economic activity in most emerging market economies decelerated sharply in the third quarter, though a surge in agricultural output helped to support activity in Mexico, and the Brazilian economy continued to expand rapidly. In Asia, output decelerated significantly, as the pace of real activity moderated in China and several other economies saw declines in real GDP. Recent readings on production, sales, and exports suggest that emerging market economies weakened further in the current quarter. Headline inflation generally declined across emerging market economies, primarily because of lower food and energy prices and, in some cases, weaker economic activity. In the United States, headline consumer prices declined in recent months while core consumer price inflation slowed further. With energy prices falling sharply and the rate of increase in food prices moderating, headline PCE prices fell in October, and data from the consumer price index (CPI) indicated that the decline extended into November. Core PCE prices were unchanged in October, and based on the CPI, appeared to have been unchanged again in November. The recent slowing in core consumer price inflation was widespread and likely reflected not only the weak pace of economic activity but also the easing of some earlier cost pressures as the prices of crude oil, gasoline, and other commodities declined. Excluding food and energy, producer prices rose modestly again in November, as prices at earlier stages of processing continued to retreat for the third consecutive month. Measures of inflation expectations continued to fall or hold steady during the intermeeting period. Measures of nominal hourly labor compensation continued to increase moderately in the third quarter. At its October 28-29 meeting, the Federal Open Market Committee (FOMC) lowered its target for the federal funds rate 50 basis points to 1 percent. The Committee's statement noted that economic activity appeared to have slowed markedly, due importantly to a decline in consumer expenditures. Business equipment spending and industrial production had weakened in recent months, and slowing economic activity in many foreign economies was damping the prospects for U.S. exports. Moreover, the intensification of financial market turmoil was likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit. The Committee noted that, in light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, it expected inflation to moderate in coming quarters to levels consistent with price stability. The Committee also noted that recent policy actions, including the rate reduction that was approved at the October 28-29 meeting, coordinated interest rate cuts by central banks, extraordinary liquidity measures, and official steps to strengthen financial systems, should help over time to improve credit conditions and promote a return to moderate economic growth. Nevertheless, downside risks to economic activity remained and the Committee indicated that it would monitor economic and financial developments carefully and act as needed to promote sustainable economic growth and price stability. Over the intermeeting period, investors marked down their expectations for the path of monetary policy. Policy expectations were largely unaffected by the outcome of the October 28-29 FOMC meeting, as the Committee's decision to reduce the target federal funds rate was broadly anticipated and the accompanying statement was reportedly in line with investor expectations. Subsequently, however, the expected future path of monetary policy dropped amid data releases that suggested a weaker outlook for economic activity and lower inflation than had been anticipated, along with continued strains in financial markets that weighed on investor sentiment. Yields on nominal Treasury coupon securities declined significantly over the intermeeting period in response to safe-haven demands as well as the downward revisions in the economic outlook and the expected policy path. Meanwhile, yields on inflation-indexed Treasury securities declined by smaller amounts, leaving inflation compensation lower. Although the decline in inflation compensation occurred amid sharp decreases in inflation measures and energy prices, it was likely amplified by increased investor preference for the greater liquidity of nominal Treasury securities relative to that of inflation-protected Treasury securities. Conditions in short-term funding markets remained strained for most of the intermeeting period, though some signs of improvement were evident. The spreads of London interbank offered rates, or Libor, over comparable-maturity overnight index swap rates declined noticeably across most maturities early in the intermeeting period; however, some of this decline was reversed once maturities began to lengthen past year-end. Trading in longer-term interbank funding markets reportedly remained thin. Credit outstanding under the Federal Reserve's Term Auction Facility (TAF) increased to about $448 billion because of expanded auction sizes. Recent auctions for both 28-day and 84-day credit from the TAF were undersubscribed, and bidding for the two forward TAF auctions during the intermeeting period was very light. Meanwhile, primary credit outstanding remained high, although it had declined somewhat in recent weeks. Use of the Primary Dealer Credit Facility dropped significantly. A number of the Term Securities Lending Facility (TSLF) auctions were oversubscribed, as was the auction of options for 13-day Schedule 2 TSLF loans straddling the end of the year. Conditions in markets for repurchase agreements, or repos, arranged using certain types of collateral deteriorated over the intermeeting period, and liquidity for repos backed by non-Treasury, non-agency collateral remained poor. Amid high demand for safe investments, the overnight Treasury general collateral (GC) repo rate remained very low and fell to around zero late in the intermeeting period. Still, failures to deliver in the Treasury market declined substantially from the levels reached in October and overnight securities lending from the System Open Market Account portfolio fell sharply. Heavy demand for safe instruments was also apparent in the Treasury bill market, where yields turned negative at times. During the intermeeting period, the Treasury announced that it would not roll over bills related to the Supplementary Financing Program in order to preserve flexibility in the conduct of debt management policy, and uncertainty about supply reportedly exacerbated poor liquidity conditions in the bill market. Despite the decline in spreads of agency and mortgage-backed repo rates over Treasury GC rates later in the period, strains in these markets remained evident, with bid-asked spreads and haircuts very elevated. In contrast, conditions in the commercial paper (CP) market improved over the intermeeting period, likely as a reflection of recent measures taken in support of this market. Spreads on 30-day A1/P1 and asset-backed commercial paper (ABCP) continued to narrow after the Commercial Paper Funding Facility (CPFF) became operational on October 27, although spreads subsequently reversed a portion of the declines as maturities crossed over year-end. In contrast, spreads on commercial paper not eligible for purchase under the CPFF remained elevated. The dollar amounts of unsecured financial CP and ABCP outstanding rebounded from their October lows, though issuance into the CPFF more than accounted for this increase. Credit outstanding under the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility fell by more than half over the intermeeting period. The Money Market Investor Funding Facility program registered no activity. As financial market conditions worsened over the intermeeting period, investors seemed to become more concerned about the likelihood of a deep and prolonged recession. In addition, the Treasury Department's announcement that funds from the Troubled Asset Relief Program would not be used to purchase securities backed by mortgage-related and other assets appeared to prompt negative price reactions in several financial markets. Stock prices of financial corporations fell considerably, while broad equity indexes declined, on net, amid high volatility. Yields on investment-grade bonds moved lower, but risk spreads on these instruments over comparable-maturity Treasury securities widened substantially as yields on Treasury securities fell more. Yields and risk spreads on speculative-grade bonds soared, and credit default swap spreads on speculative-grade, as well as investment-grade, corporate bonds widened further. Gross issuance of bonds by nonfinancial investment-grade companies continued at a solid pace, but issuance of speculative-grade bonds remained at zero. Issuance of leveraged syndicated loans was also extremely weak. Strains were evident in a number of other financial markets as well. The functioning of Treasury markets remained impaired, and premiums for the on-the-run ten-year nominal Treasury security rose from levels that were already elevated. The market for commercial mortgage-backed securities experienced a particularly pronounced selloff. Reflecting investor concerns about the conditions of financial institutions, spreads on credit default swaps for U.S. banks widened sharply, and those for insurance companies remained elevated. To support market stability, the U.S. government on November 23 entered into an agreement with Citigroup to provide a package of capital, guarantees, and liquidity access. In other developments, banking organizations began to take advantage of the Federal Deposit Insurance Corporation's (FDIC) Temporary Liquidity Guarantee Program; eleven institutions issued bonds under the program. In view of the tightening of credit conditions for consumers and small businesses, the Federal Reserve announced on November 25 the creation of the Term Asset-Backed Securities Loan Facility to support the markets for asset-backed securities collateralized by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration. The facility, developed jointly with the Treasury, was expected to be operational by February 2009, and discussions with market participants about operational details of this facility were ongoing. The Federal Reserve also announced on November 25 that, to help reduce the cost and increase the availability of residential mortgage credit, it would initiate a program to purchase up to $100 billion in direct obligations of housing-related government-sponsored enterprises (GSEs) and up to $500 billion in MBS backed by Fannie Mae, Freddie Mac, and Ginnie Mae. Agency debt spreads, which had widened early in the period, narrowed somewhat after the announcement. Subsequent purchases of agency debt by the Open Market Desk at the Federal Reserve Bank of New York led to a further reduction in agency spreads. Likely reflecting in part these developments, conditions in the primary residential mortgage market improved. The interest rate on 30-year fixed-rate conforming mortgages declined, which prompted a noticeable increase in mortgage refinancing. M2 expanded at a considerably slower rate in November than October. Retail money funds contracted after a surge in October that reflected safe-haven inflows to Treasury-only funds. Small time deposits increased somewhat more slowly than in October, although the rate of expansion remained quite rapid as banks continued to bid aggressively for these deposits. Flows into demand deposits covered by the FDIC's new temporary guarantee program were significant and apparently reflected shifts out of savings accounts as well as redirection of funds by banks' customers away from other money market instruments. Currency continued its strong increase, apparently boosted by solid foreign demand for U.S. banknotes. Liquidity conditions in the money markets of major foreign economies improved but remained strained over the intermeeting period. Movements in stock prices were mixed in the advanced foreign economies, although equity prices generally rose in emerging market economies. In response to evidence of a slowdown in economic activity and a rapid waning of inflationary pressures, central banks around the world eased policy sharply. Sovereign bond yields fell, reflecting prospects for lower inflation and lower policy rates for an extended period. The dollar declined on balance against the currencies of major U.S. trading partners. In the forecast prepared for the meeting, the staff revised down sharply its outlook for economic activity in 2009 but continued to project a moderate recovery in 2010. Real GDP appeared likely to decline substantially in the fourth quarter of 2008 as conditions in the labor market deteriorated more steeply than previously anticipated; the decline in industrial production intensified; consumer and business spending appeared to weaken; and financial conditions, on balance, continued to tighten. Rising unemployment, the declines in stock market wealth, low levels of consumer sentiment, weakened household balance sheets, and restrictive credit conditions were likely to continue to hinder household spending over the near term. Homebuilding was expected to contract further. Business expenditures were also likely to be held back by a weaker sales outlook and tighter credit conditions. Oil prices, which dropped significantly during the intermeeting period, were assumed to rise over the next two years in line with the path indicated by futures market prices, but to remain below the levels of October 2008. All told, real GDP was expected to fall much more sharply in the first half of 2009 than previously anticipated, before slowly recovering over the remainder of the year as the stimulus from monetary and assumed fiscal policy actions gained traction and the turmoil in the financial system began to recede. Real GDP was projected to decline for 2009 as a whole and to rise at a pace slightly above the rate of potential growth in 2010. Amid the weaker outlook for economic activity over the next year, the unemployment rate was likely to rise significantly into 2010, to a level higher than projected at the time of the October 28-29 FOMC meeting. The disinflationary effects of increased slack in resource utilization, diminished pressures from energy and materials prices, declines in import prices, and further moderate reductions in inflation expectations caused the staff to reduce its forecast for both core and overall PCE inflation. Core inflation was projected to slow considerably in 2009 and then to edge down further in 2010. In their discussion of the economic situation and outlook, all meeting participants agreed that the economic downturn had intensified over the fall. Although some financial markets exhibited signs of improved functioning, financial conditions generally remained very strained. Credit conditions continued to tighten for both households and businesses, and ongoing declines in equity prices further reduced household wealth. Conditions in the housing market weakened again and house prices declined further. Against this backdrop, measures of business and consumer confidence fell to new lows, and private spending continued to contract. Employment and production indicators weakened further as businesses responded very rapidly to the fall-off in demand. Participants expected economic activity to contract sharply in the fourth quarter of 2008 and in early 2009. Most projected that the economy would begin to recover slowly in the second half of 2009, aided by substantial monetary policy easing and by anticipated fiscal stimulus. Meeting participants generally agreed that the uncertainty surrounding the outlook was considerable and that downside risks to even this weak trajectory for economic activity were a serious concern. Indeed, the severe ongoing financial market strains, the large reductions in household wealth, and the global nature of the economic slowdown were seen by some participants as suggesting the distinct possibility of a prolonged contraction, although that was not judged to be the most likely outcome. Inflation pressures had diminished appreciably as energy and other commodity prices dropped and economic activity slumped. Looking forward, participants agreed that inflationary pressures looked set to moderate further in coming quarters, reflecting recent declines in commodity prices and rising slack in resource markets, and several saw risks that inflation could drop for a time below rates they viewed as most consistent over time with the Federal Reserve's dual mandate for maximum employment and price stability. Meeting participants observed that financial strains continued to exert a powerful drag on economic activity and that the adverse feedback loop between financial conditions and economic performance had intensified. Although improvements were evident in some markets, particularly those for highly rated commercial paper and for interbank funds, financial markets generally remained under severe stress. Equity prices continued to drop amid high volatility, further reducing household wealth. Rising risk spreads kept the cost of issuing corporate bonds at a high level--especially for lower-rated firms--even though Treasury yields had declined sharply since the October 28-29 meeting. Securitization markets, which over recent years had been an important channel in credit intermediation, remained largely dysfunctional, with the exception of those for mortgages guaranteed by the GSEs. The sharp drops and unusual volatility in the prices of many financial assets since the beginning of the fourth quarter were likely to cause more losses for financial institutions, and a number of participants noted that loan delinquencies were increasing significantly in the consumer sector, adding to pressures on banks' balance sheets and reinforcing banks' cautious lending stance. As a consequence, credit conditions for both businesses and households had tightened further, with banks generally adopting stricter lending standards and declining to renew or paring back existing credit lines. Participants observed that the effects of the financial turmoil, increased uncertainty, and drops in confidence and demand were becoming increasingly evident in the business sector. Business contacts across the country expected considerable near-term weakness in sales and declining pricing power. Some meeting participants reported especially sharp drops in new orders in their Districts. Even sectors that had performed relatively well until recently, such as mining and drilling, were experiencing reduced activity, mostly due to the decline in commodity prices. Agricultural activity was also showing signs of weakness. Business sentiment had deteriorated sharply since September, likely contributing to steep drops in employment and production. Participants anticipated that, with the deteriorating economic outlook and tightening of credit conditions, capital expenditures were likely to be soft in coming quarters. Many participants noted that the decline in household wealth resulting from large drops in equity and house prices, together with tighter credit conditions, rapidly increasing unemployment, and deteriorating consumer sentiment, was contributing to a sharp contraction in consumer spending. Some participants pointed out that reduced consumer wealth and concerns about employment could lead to a further increase in saving, which, although desirable in the longer term, could put additional downward pressure on consumer spending in coming quarters. The latest housing data suggested a continued substantial contraction in that sector. The recent decline in mortgage rates had sparked some refinancing and purchase activity, but the extent of the longer-term impact of lower rates on housing demand remained uncertain. Meeting participants noted that economic conditions had deteriorated substantially in recent months in both advanced and emerging market economies. As a consequence, demand for U.S. exports had weakened, held back also by the strengthening of the dollar since the summer. Going forward, global demand was expected to remain weak, and thus growth in exports was unlikely to provide much support for U.S. activity. However, the weakness in the global economy was contributing to lower prices of energy and other commodities, which should boost real incomes and provide modest support to household spending. Participants agreed that falling prices for energy and other commodities and diminished economic activity had resulted in an appreciable reduction in inflationary pressures. Those pressures were seen as likely to continue to abate because of the emergence of substantial slack in resource utilization and diminishing pricing power. Participants were uncertain about the extent to which inflation would fall. Some saw inflation leveling out near desired levels, while others expressed concern that inflation might decline below levels consistent with price stability in the medium term. Participants generally agreed that inflation expectations were an important determinant of future price dynamics. Some noted that those expectations, especially at longer horizons, appeared well anchored. However, some survey evidence suggested that firms expected prices to continue to decline as they had over the previous few months. Several participants observed that monitoring measures of inflation expectations for signs of disinflationary dynamics would be especially important going forward. In a joint session of the Federal Open Market Committee and the Board of Governors, meeting participants discussed extensively how in current circumstances the Committee could best support the resumption of sustainable economic growth and promote the maintenance of price stability over the medium term. Participants noted that very low levels of the federal funds rate had the potential to help buoy aggregate demand and economic activity, but they also had potential costs in terms of the functioning of certain financial markets and some financial institutions. Most participants judged that the benefits in terms of support for the overall economy of federal funds rates close to, but slightly above, zero probably outweighed the adverse effects. With the federal funds rate already trading at very low levels as a result of the large volume of excess reserves associated with the Federal Reserve's liquidity operations, participants agreed that the Committee would need to focus on other tools to impart additional monetary stimulus to the economy in the near term. One broad class of such tools was the use of FOMC communication with the public to provide more information regarding future policy intentions. In particular, participants judged that communicating the Committee's expectation that short-term interest rates were likely to stay exceptionally low for some time could be useful because it could lead to pricing of longer-term interest rates consistent with the path of monetary policy that policymakers saw as most likely. Participants emphasized the importance of explicitly conditioning communication regarding future policy on the evolution of the economic outlook. Another possible form of communication that participants discussed was a more explicit indication of their views on what longer-run rate of inflation would best promote their goals of maximum employment and price stability. The added clarity in that regard might help forestall the development of expectations that inflation would decline below desired levels, and hence keep real interest rates low and support aggregate demand. Meeting participants also discussed how best to employ the Federal Reserve's balance sheet to promote monetary policy goals. The Federal Reserve had already adopted a series of programs that were providing liquidity support to a range of institutions and markets, and participants generally agreed that a continued focus on the quantity and the composition of Federal Reserve assets would be necessary and desirable. Specifically, participants discussed the merits of purchasing large quantities of longer-term securities such as agency debt, agency mortgage-backed securities, and Treasury securities. The available evidence indicated that such purchases would reduce yields on those instruments, and lower yields on those securities would tend to reduce borrowing costs for a range of private borrowers, although participants were uncertain as to the likely size of such effects. Participants also generally believed that the special liquidity and lending facilities implemented or announced recently would support the availability of credit to businesses and households and thus help sustain economic activity. Many participants thought that the Federal Reserve should continue to consider whether expanding some of the existing facilities and creating new facilities could be helpful. Participants emphasized that the ultimate objective of special lending facilities and asset purchases was to support overall market functioning, financial intermediation, and economic growth. Participants acknowledged that the effective federal funds rate probably would need to remain very low for some time. However, they also recognized that, as economic activity recovered and financial conditions normalized, the use of certain policy tools would need to be scaled back, the size of the balance sheet and level of excess reserves would need to be reduced, and the Committee's policy framework would return to focus on the level of the federal funds rate. A number of participants observed that, under the approach of conducting monetary policy by acquiring a variety of assets as needed to address financial and macroeconomic strains, the quantity of excess reserves and the size of the Federal Reserve's balance sheet would be determined by the Federal Reserve's asset purchases and the usage of its lending facilities. It was likely that, during the period of financial turmoil, the size of the Federal Reserve's balance sheet would need to be maintained at a high level. Participants discussed the potential advantages and disadvantages of setting quantitative targets for bank reserves or the monetary base. Some were of the view that quantitative targets for an increasing reserve base could be effective in preventing deflationary dynamics and useful in communicating to the public the Committee's determination to take the steps needed to avoid such an outcome. Several other participants, however, noted that increases in excess reserves or the monetary base, by themselves, might not have a significant stimulative effect on the economy or prices because the normal bank intermediation mechanism appeared to be impaired, and banks may not be willing to lend their excess reserves. Conversely, a decline in excess reserves or the monetary base would not necessarily be contractionary if it occurred in the context of improving financial market conditions. A few of those who supported quantitative base or reserve targets did so because they saw them as helping to coordinate the actions of the Board of Governors, which is responsible for authorizing most special liquidity and lending facilities, and the Committee, which is responsible for open market operations. Most participants, however, were of the view that such coordination would best be achieved by continued close cooperation and consultation between the Committee and the Board. Going forward, consideration will be given to whether various quantitative measures would be useful in calibrating and communicating the stance of monetary policy. In the discussion of monetary policy for the intermeeting period, Committee members recognized that the large volume of excess reserves had already resulted in federal funds rates significantly below the target federal funds rate and the interest rate on excess reserves. They agreed that maintaining a low level of short-term interest rates and relying on the use of balance sheet policies and communications about monetary policy would be effective and appropriate in light of the sharp deterioration of the economic outlook and the appreciable easing of inflationary pressures. Maintaining that level of the federal funds rate implied a substantial further reduction in the target federal funds rate. Even with the additional use of nontraditional policies, the economic outlook would remain weak for a time and the downside risks to economic activity would be substantial. Moreover, inflation would continue to fall, reflecting both the drop in commodity prices that had already occurred and the buildup of economic slack; indeed some members saw significant risks that inflation could decline and persist for a time at uncomfortably low levels. Members debated how best to communicate their decisions regarding monetary policy actions. Since the large amount of excess reserves in the system would limit the Federal Reserve's control over the federal funds rate, several members thought that it might be preferable not to set a specific target for the federal funds rate. Indeed, those members felt that lack of an explicit target could be helpful, in that it would focus attention on the shift in the policy framework from targeting the federal funds rate to the use of balance sheet policies and communications about monetary policy as a way of providing further monetary stimulus. A few members stressed that the absence of an explicit federal funds rate target would give banks added flexibility in pricing loans and deposits in the current environment of unusually low interest rates. However, other members noted that not announcing a target might confuse market participants and lead investors to believe that the Federal Reserve was unable to control the federal funds rate when it could, in fact, still influence the effective federal funds rate through adjustments of the interest rate on excess reserves and the primary credit rate. The members decided that it would be preferable for the Committee to communicate explicitly that it wanted federal funds to trade at very low rates; accordingly, the Committee decided to announce a target range for the federal funds rate of 0 to 1/4 percent. Members also agreed that the statement should indicate that weak economic conditions were likely to warrant exceptionally low levels of the federal funds rate for some time. The members emphasized that their expectation about the path of the federal funds rate was conditioned on their view of the likely path of economic activity. Members also discussed how best to communicate the focus of the Federal Reserve's policy going forward. Members agreed that the statement should indicate that all available tools would be employed to promote the resumption of sustainable economic growth and to preserve price stability. They also agreed that the statement should note that it was the Committee's intention to sustain the size of the Federal Reserve's balance sheet at a high level through open market operations and other measures to support financial markets and stimulate the economy. In addition to the already-announced asset purchases and liquidity programs, members concurred that the statement should indicate that the Committee stands ready to expand purchases of agency debt and agency mortgage-backed securities, and that it is evaluating the potential benefits of purchasing longer-term Treasury securities. In light of the use of additional tools for implementing monetary policy, the Committee revised the form of the directive to the Open Market Desk of the Federal Reserve Bank of New York. In addition to specifying that it now seeks conditions in reserve markets consistent with federal funds trading in a range of 0 to 1/4 percent, the Committee instructed the Desk to purchase up to $100 billion in housing-related GSE debt and up to $500 billion in agency-guaranteed MBS by the end of the second quarter of 2009. Members agreed that they should not specify the precise timing of these purchases, but that they should leave discretion to the Desk to intervene depending on market and broader economic conditions. The directive also noted that the Manager of the System Open Market Account and the Secretary of the FOMC would keep the Committee informed of developments regarding the System's balance sheet that could affect the attainment of the Committee's statutory objectives. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range of 0 to 1/4 percent. The Committee directs the Desk to purchase GSE debt and agency-guaranteed MBS during the intermeeting period with the aim of providing support to the mortgage and housing markets. The timing and pace of these purchases should depend on conditions in the markets for such securities and on a broader assessment of conditions in primary mortgage markets and the housing sector. By the end of the second quarter of next year, the Desk is expected to purchase up to $100 billion in housing-related GSE debt and up to $500 billion in agency-guaranteed MBS. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability." The vote encompassed approval of the statement below to be released at 2:15 p.m.: "The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent. Since the Committee's last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined. Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further. Meanwhile, inflationary pressures have diminished appreciably. In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate further in coming quarters. The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time. The focus of the Committee's policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve's balance sheet at a high level. As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant. The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities. Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity." Votes for this action: Mr. Bernanke, Mses. Cumming and Duke, Messrs. Fisher, Kohn, and Kroszner, Ms. Pianalto, Messrs. Plosser, Stern, and Warsh. Votes against this action: None. Ms. Cumming voted as the alternate for Mr. Geithner. The Committee also continued its discussion of possible refinements to the Committee's approach to projections that could provide additional information about participants' views of longer-run sustainable rates of economic growth and unemployment and the measured rates of inflation that would be consistent with price stability, but it made no decisions regarding these issues. Finally, staff briefed the Committee on the progress of plans for implementing the Federal Reserve's Term Asset-Backed Securities Loan Facility, which had initially been announced on November 25, 2008. It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, January 27-28, 2009. The meeting adjourned at 3:00 p.m. on December 16, 2008. Notation VotesBy notation vote completed on November 18, 2008, the Committee unanimously approved the minutes of the FOMC meeting held on October 28-29, 2008. By notation vote completed on November 26, 2008, the Committee unanimously approved the extension until April 30, 2009, of its authorization for the Federal Reserve Bank of New York to engage in transactions with primary dealers through the Term Securities Lending Facility, subject to the same collateral, interest rate, and other conditions previously established by the Committee. _____________________________Brian F. MadiganSecretary 1. Attended Tuesday's session. Return to text2. Attended the portion of the meeting relating to the zero lower bound on nominal interest rates. Return to text3. Attended the meeting through the discussion of the zero lower bound on nominal interest rates. Return to text Return to top

2008-12-16

Statement

The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent.  Since the Committee's last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined.  Financial markets remain quite strained and credit conditions tight.  Overall, the outlook for economic activity has weakened further. Meanwhile, inflationary pressures have diminished appreciably.  In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate further in coming quarters. The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability.  In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.  The focus of the Committee's policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve's balance sheet at a high level.  As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant.  The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities.  Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses.  The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity. Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Christine M. Cumming; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. In a related action, the Board of Governors unanimously approved a 75-basis-point decrease in the discount rate to 1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Cleveland, Richmond, Atlanta, Minneapolis, and San Francisco.  The Board also established interest rates on required and excess reserve balances of 1/4 percent.

2008-11-19

Minute

A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, October 28, 2008 at 2:00 p.m. and continued on Wednesday, October 29, 2008 at 9:00 a.m. PRESENT:Mr. Bernanke, ChairmanMr. Geithner, Vice ChairmanMs. DukeMr. FisherMr. KohnMr. KrosznerMs. PianaltoMr. PlosserMr. SternMr. Warsh Ms. Cumming, Messrs. Evans, Lacker, and Lockhart, and Ms. Yellen, Alternate Members of the Federal Open Market Committee Messrs. Bullard, Hoenig, and Rosengren, Presidents of the Federal Reserve Banks of St. Louis, Kansas City, and Boston, respectively Mr. Madigan, Secretary and EconomistMs. Danker, Deputy SecretaryMr. Skidmore, Assistant SecretaryMs. Smith, Assistant SecretaryMr. Alvarez, General CounselMr. Baxter, Deputy General CounselMr. Sheets, Economist Mr. Stockton, Economist Messrs. Connors, English, and Kamin, Ms. Mester, Messrs. Rosenblum, Slifman, Sniderman, and Wilcox, Associate Economists Mr. Dudley, Manager, System Open Market Account Ms. Bailey, Deputy Director, Division of Banking Supervision and Regulation, Board of Governors Mr. Clouse, Deputy Director, Division of Monetary Affairs, Board of Governors Mr. Struckmeyer,1 Deputy Staff Director, Office of Staff Director for Management, Board of Governors Mr. Blanchard, Assistant to the Board, Office of Board Members, Board of Governors Messrs. Reifschneider and Wascher, Associate Directors, Division of Research and Statistics, Board of Governors Messrs. Levin and Nelson, Associate Directors, Division of Monetary Affairs, Board of Governors Ms. Kole, Assistant Director, Division of International Finance, Board of Governors Mr. McCarthy, Visiting Reserve Bank Officer, Division of Monetary Affairs, Board of Governors Mr. Oliner, Senior Adviser, Division of Research and Statistics, Board of Governors Mr. Small, Project Manager, Division of Monetary Affairs, Board of Governors Messrs. Bassett and Luecke, Section Chiefs, Division of Monetary Affairs, Board of Governors Mr. Morin, Senior Economist, Division of Research and Statistics, Board of Governors Ms. Low, Open Market Secretariat Specialist, Division of Monetary Affairs, Board of Governors Mr. Moore, First Vice President, Federal Reserve Bank of Cleveland Mr. Fuhrer, Executive Vice President, Federal Reserve Bank of Boston Messrs. Altig and McAndrews, Ms. Mosser, Messrs. Rasche, Sullivan, and Williams, Senior Vice Presidents, Federal Reserve Banks of Atlanta, New York, New York, St. Louis, Chicago, and San Francisco, respectively Messrs. Clark and Hornstein, Vice Presidents, Federal Reserve Banks of Kansas City and Richmond, respectively Mr. Weber, Senior Research Officer, Federal Reserve Bank of Minneapolis The Manager of the System Open Market Account reported on recent developments in foreign exchange markets. There were no open market operations in foreign currencies for the System's account in the period since the previous meeting. The Manager also reported on developments in domestic financial markets and on System open market operations in government securities and federal agency obligations during the period since the previous meeting. By unanimous vote, the Committee ratified these transactions. In the discussion of System open market operations over the period, it was noted that reserve management had become more complex as a result of the large provision of reserves associated with the recent expansion of the Federal Reserve's liquidity facilities; in particular, the effective federal funds rate had been persistently below the FOMC's target. While the payment of interest on reserves seemed to be helpful in mitigating downward pressure on the funds rate, a number of institutions evidently were willing to sell funds at interest rates below that paid on excess reserve balances. Anecdotal reports suggested that this was particularly the case for those institutions that are not eligible to receive interest on the balances they maintain at the Federal Reserve. Going forward, however, the interest rate on excess reserve balances could be adjusted, and it might establish a more effective floor on the federal funds rate over time as more depository institutions revise their strategies in the federal funds market in light of the payment of interest on reserves. In view of a further widening in financial market strains internationally, the Committee considered proposals to establish temporary reciprocal currency ("swap") arrangements with several additional foreign central banks. Members unanimously approved the following resolution, which effectively permitted the Foreign Currency Subcommittee to establish a swap line with the Reserve Bank of New Zealand. "The FOMC amends paragraph 1.A. of the Authorization for Foreign Currency Operations to include the New Zealand dollar in the list of foreign currencies in which the Federal Reserve Bank of New York may transact for the System Open Market Account." Meeting participants also discussed a proposal to set up temporary liquidity-related swap arrangements with the central banks of Mexico, Brazil, Korea, and Singapore. In their remarks, participants focused on the outlook for complementarity between these swaps and the new short-term liquidity facility that the International Monetary Fund was considering; on the governance and structure of the swap lines; and on the particular countries included. Several participants pointed to the international reserves held by the countries and the importance of ensuring that these temporary swap lines, like the others that had been established during this period, be used only for the purposes intended. On balance, the Committee concluded that in current circumstances the swap arrangements with these four large and systemically important economies were appropriate, and it unanimously approved the following resolutions. "The FOMC directs the Federal Reserve Bank of New York to establish and maintain a reciprocal currency arrangement ("swap arrangement") for the System Open Market Account with each of (i) the Banco Central do Brasil, (ii) the Bank of Korea, (ii) the Banco de Mexico, and (iv) the Monetary Authority of Singapore. Each such swap arrangement would be for an aggregate amount not to exceed $30 billion. Drawings under the arrangement require approval. Unless extended by the Committee, each such swap arrangement shall expire on April 30, 2009. The FOMC amends paragraph 1.A. of the Authorization for Foreign Currency Operations to include the Brazilian real, the Korean won, and the Singapore dollar in the list of foreign currencies in which the Federal Reserve Bank of New York may transact for the System Open Market Account. The FOMC delegates to the Foreign Currency Subcommittee the authority to approve individual drawing requests of up to $5 billion under each of the aforementioned swap arrangements with the Banco Central do Brasil, the Bank of Korea, the Banco de Mexico, and the Monetary Authority of Singapore." A number of adverse financial developments influenced economic and financial market conditions over the intermeeting period. Lehman Brothers Holdings had filed for bankruptcy the day before the meeting of the Committee in September. In large part because of losses on Lehman debt, the net asset value of a major money market mutual fund fell below $1 per share, spurring a substantial outflow from money market mutual funds and straining their liquidity. The rapid deterioration of American International Group, Inc. (AIG), and Wachovia Corporation, along with the closing of Washington Mutual, led to intensified market concerns about the condition of financial institutions. In this environment, investors pulled back from risk-taking, funding markets for terms beyond overnight largely ceased to function at times, credit risk spreads rose sharply, and equity prices registered steep declines. The information reviewed at the October meeting indicated that economic conditions deteriorated in recent months. The labor market weakened further in September as private payrolls fell at a faster pace than earlier in the year and the unemployment rate remained above 6 percent. Industrial production fell in September, although much of the drop was related to effects of recent hurricanes and a strike at an aircraft manufacturer. Consumer spending declined, reflecting stagnant real income, tighter credit, declining wealth, and concerns about economic conditions. The housing market remained weak, with construction activity, new home sales, and home prices falling further. Business spending on equipment and software appeared to have declined again in the third quarter, and indicators of investment in structures weakened. Economic activity in many foreign economies slowed in recent months. Headline consumer inflation measures, pulled down by declines in consumer energy prices, moderated in August and September. Core consumer inflation measures also eased somewhat in these two months. The labor market continued to weaken. According to the September labor market report, the unemployment rate remained at 6.1 percent, but private payroll employment fell faster than the average pace earlier in the year. Most major industry groups shed jobs. The manufacturing, construction, and temporary help industries continued to experience sizable losses in employment; meanwhile, retail trade and financial services registered larger declines than earlier in the year. Nonbusiness services added jobs, but at the slowest rate of the year. The average workweek and aggregate hours declined in September, and weekly unemployment insurance claims continued to rise in October. Industrial production dropped sharply in September. Although much of the decline was due to the effects of the recent hurricanes and a strike at an aircraft manufacturer, most major industries experienced slow or declining output in recent months. Motor vehicle assemblies were unchanged in the third quarter at a low level. The pace of high-tech equipment production slowed in the third quarter relative to its rate in the first half of the year, reportedly in part because tight credit conditions were restraining demand. Available information suggested that demand and production in this sector were likely to remain relatively subdued over the coming months. The output of other manufacturing sectors declined in the third quarter. While standard indicators of near-term production suggested factory output would decline further over the next few months, the recovery of production in industries affected by the hurricanes was expected to offset these declines to a degree. The factory utilization rate fell in September to well below its long-run average. Real personal consumption expenditures (PCE) apparently declined in September for the fourth consecutive month. Motor vehicle sales fell back to their very low July pace, and preliminary reports indicated that the slump continued into October, as tighter credit conditions were restraining demand. Purchases of goods other than motor vehicles were estimated to have fallen noticeably. Real outlays on services other than energy increased only modestly in July and August. Real disposable income, excluding the effects of tax rebates and the emergency unemployment benefits, was little changed in July and August from the second-quarter average. Measures of consumer sentiment dropped in October to near or below their low levels of midyear, with the Conference Board measure exceptionally low. Residential construction activity continued to decline steeply through the third quarter. In September, both single-family housing starts and permit issuance fell. In the multifamily sector, starts edged up in September but remained toward the lower end of their two-year range. New home sales in August and September were at a pace well below that of the first half of the year. Although the cutbacks in homebuilding had reduced the inventory of unsold houses, the slower rate of sales kept the months' supply of new homes very elevated relative to the level that had prevailed before the downturn in the housing market. Sales of existing single-family homes in September were somewhat higher than they had been earlier in the year, likely supported by increases in foreclosure-related sales. Tight conditions in mortgage markets continued to restrain housing demand, especially for borrowers needing nonconforming mortgages. Several indexes indicated that house prices declined substantially over the 12 months through August. In the business sector, investment in equipment and software appeared to weaken further in the third quarter. Nominal shipments of nondefense capital goods excluding aircraft were flat in the third quarter, while orders for those goods declined. Demand for high-tech equipment appeared to have softened considerably, and spending on non-high-tech, non-transportation equipment was estimated to have fallen. Transportation equipment investment was held down in the third quarter by falling sales for medium and heavy trucks and by a strike-induced drop in aircraft deliveries in September. Nominal expenditures on nonresidential structures declined for the second consecutive month in August. Forward-looking indicators turned more downbeat: Vacancy rates for commercial properties rose further, property values declined, and the architectural billings index fell in September. Furthermore, the latest Senior Loan Officer Opinion Survey on Bank Lending Practices indicated that banks tightened lending standards for commercial real estate loans over the past three months. The book-value data for manufacturing and trade inventories suggested that the real value of inventories continued to decline over the summer through August, but a number of indicators suggested that stocks in some industries remained above desired levels. The days' supply of light motor vehicles at dealers had risen, on balance, through the year and was rather high in September. The ratio of book-value inventories to sales in the manufacturing and trade sectors, excluding motor vehicles, rose in August, particularly in a number of durable goods sectors. In addition, the index of customers' inventories in the Institute of Supply Management's manufacturing survey indicated that inventories remained above desired levels. The U.S. international trade deficit narrowed in August, with a decline in the value of imports more than offsetting a fall in the value of exports of goods and services. A drop in the value of petroleum imports, which reflected both lower volumes and a decrease in prices, exceeded an increase in non-oil imports that was driven by a rise in imports of consumer goods and industrial supplies. Exports of automotive products fell sharply in August after a surge in July, and exports of consumer goods, industrial supplies, and services moved down after strong increases in previous months. Aircraft exports surged, but sales of other capital goods declined. The data for the advanced foreign economies during the intermeeting period generally suggested that economic activity was weakening further, and confidence indicators in these areas declined as the financial crisis worsened. Labor market conditions deteriorated in these economies, with the exception of Canada. Real gross domestic product (GDP) fell in the United Kingdom in the third quarter. Headline inflation continued to be elevated in many economies, but the most recent consumer price indexes for Japan and for the euro area suggested some deceleration in prices. In emerging market economies, data received over the intermeeting period showed a continued slowing of real activity. Real GDP growth in China moved down in the third quarter. Industrial production contracted in recent months for many countries. External balances deteriorated significantly in many emerging market economies as exports to advanced economies slowed. Headline inflation in emerging market economies eased, reflecting falling oil and food prices. Headline consumer prices in the United States were estimated to have risen only modestly in September, extending the recent moderation of overall inflation following the rapid increases earlier in the year. Consumer energy prices fell for the second consecutive month, while retail food prices continued to climb at a rapid pace, boosted by the substantial run-up in farm commodity prices through midyear. Core consumer price inflation rose somewhat during the third quarter, reflecting the pass-through of previous increases in the costs of energy and materials and import prices. Those upward price pressures diminished recently: Prices of oil and other commodities fell sharply over the intermeeting period, and non-oil import prices as well as producer prices of intermediate materials excluding food and energy declined in September. Some survey measures of inflation expectations declined during the period. Available measures of hourly labor compensation increased at about the same moderate pace as over the past several years. At its September meeting, the Federal Open Market Committee (FOMC) kept the target federal funds rate unchanged at 2 percent. The Committee's statement noted that strains in financial markets had increased significantly and that labor markets had weakened further. Economic growth appeared to have slowed recently, which partly reflected a softening of household spending. Tight credit conditions, the ongoing housing contraction, and some slowing in export growth were likely to weigh on economic growth over the next few quarters. The Committee stated that, over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help promote moderate economic growth. Inflation had been high, spurred by the earlier increases in the prices of energy and some other commodities. The Committee expected inflation to moderate later this year and next year, but the inflation outlook remained highly uncertain. The downside risks to growth and the upside risks to inflation were both of significant concern to the Committee. The Committee indicated that it would continue to monitor economic and financial developments carefully and would act as needed to promote sustainable economic growth and price stability. Over the intermeeting period, market participants marked down their expectations for the path of the federal funds rate for the next two years. The Committee's decision to leave the target federal funds rate unchanged at the September FOMC meeting led some investors to scale back expectations for policy easing over the next year. Subsequently, however, market expectations reversed in response to the heightened financial turmoil and to generally weaker-than-expected economic data. The Committee's decision to reduce the target federal funds rate 50 basis points as part of a coordinated action with other central banks on October 8, along with the accompanying statement, led investors to mark down further the expected path for the federal funds rate. Yields on short-term nominal Treasury coupon securities declined over the intermeeting period, reportedly as a result of substantial flight-to-quality flows and heightened demand for liquidity. In contrast, higher term premiums and expectations of increases in the supply of Treasury securities associated with the Emergency Economic Stabilization Act and other initiatives seemed to put upward pressure on longer-term nominal Treasury yields. Yields on longer-term inflation-indexed Treasury securities, which are relatively illiquid, rose more sharply than did those on nominal securities. Measures of inflation compensation based on differences between nominal and inflation-indexed Treasury yields were quite volatile over the intermeeting period and, because of shifting liquidity premiums, likely provided less information than usual concerning inflation expectations or inflation uncertainty. In the wake of the failures or near failures of several large financial institutions, short-term funding markets came under significant additional pressure over the intermeeting period, and the Federal Reserve and other central banks took a number of actions to provide liquidity and improve market functioning. In the overnight federal funds market, financial institutions became more selective about the counterparties with whom they were willing to trade. The overnight London interbank offered rate (Libor) rose substantially, and the spread of term Libor rates over comparable-maturity overnight index swap (OIS) rates rose sharply from already-high levels. The demand for commercial paper declined as prime money market mutual funds experienced large net outflows after the net asset value of one such fund fell below $1 per share. As a consequence, risk spreads on commercial paper rose considerably and were very volatile. Amid strong flows into government-only money market mutual funds, the demand for short-dated Treasury bills rose, and these securities traded with very low yields despite sizable new issuance during the period. The market for repurchase agreements (repos) also experienced significant dislocations during the intermeeting period. Partly because of high demand for Treasury securities, the overnight repo rate for Treasury general collateral was near zero for much of the period, and failures to deliver Treasury securities reached record highs. Repo rates on agency collateral also were volatile, and liquidity in non-Treasury, non-agency repo markets was poor. Conditions in short-term funding markets improved somewhat following the announcements of a U.S. government guarantee of certain liabilities of U.S. banking organizations and similar actions by foreign authorities, the expansion of swap arrangements between the Federal Reserve and other central banks, and a number of initiatives by the Federal Reserve and the Treasury to address the pressures on money market mutual funds and the commercial paper market. In longer-term credit markets, yields and spreads on investment-grade and speculative-grade corporate bonds increased, while indexes of credit default swap (CDS) spreads for investment-grade financial and nonfinancial firms reached unprecedented levels. Liquidity in the corporate bond and CDS markets was strained. Issuance of investment-grade corporate bonds was moderate in September and October, while there was little issuance of speculative-grade bonds. Commercial and industrial loans continued to expand rapidly in early October, as firms drew on existing bank lines of credit. However, conditions deteriorated in the secondary market for syndicated leveraged loans, with prices falling to new lows and bid-asked spreads widening notably. Broad equity price indexes declined sharply over the intermeeting period, and option-implied volatility on the S&P 500 index rose well above its previous record high. The Senior Loan Officer Opinion Survey pointed to further tightening of terms and standards for consumer loans. Consumer credit increased at its slowest pace in more than 15 years during the three months ending in August. Conditions in the municipal bond market were also poor over much of the intermeeting period. The strains from the banking and credit crisis intensified and took on a more global aspect over the intermeeting period. This development and the related erosion of the economic outlook and reduction in inflationary pressures led many central banks to reduce their policy rates, including in the internationally coordinated action announced on October 8. Liquidity conditions in the money markets of major foreign economies deteriorated further. Spreads between term Libor and OIS rates in euros and sterling rose from already-elevated levels, although by less than in dollars. Sovereign bond yields in the advanced foreign economies were volatile; nominal yield curves in many countries steepened on net. Equity market indexes fell sharply in the advanced economies as well as in emerging market economies, which until recently had not been hit as hard by the financial turmoil. The dollar appreciated against most currencies, with the prominent exception of the Japanese yen. In the United States, M2 accelerated sharply in September, and it appeared to be on pace for another large increase in October, apparently reflecting a heightened preference by households and firms for safe assets. Liquid deposits expanded strongly in September, but leveled off in early October. Small time deposits increased briskly in September and early October as banks and thrifts reportedly continued to bid aggressively for these deposits. Retail money funds, which were little changed in September, experienced significant net inflows in early October. In contrast, institutional money funds, which are not included in M2, experienced substantial outflows during this period. In response to the extraordinary stresses in financial markets, the Federal Reserve together with other U.S. government agencies and many foreign central banks and governments implemented a number of unprecedented policy initiatives during the intermeeting period. Early in the period, the condition of AIG, a large complex financial institution, deteriorated rapidly. In view of the likely systemic implications and the potential for significant adverse effects on the economy of a disorderly failure of AIG, the Federal Reserve Board on September 16, with the support of the Treasury, authorized the Federal Reserve Bank of New York to lend up to $85 billion to the firm to assist it in meeting its obligations and to facilitate the orderly sale of some of its businesses. On October 8, the Federal Reserve announced a supplemental liquidity arrangement for AIG. The Federal Reserve Board also approved a number of new facilities to address strains in short-term funding markets. On September 19, it announced the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), which extends nonrecourse loans at the primary credit rate to U.S. depository institutions and bank holding companies to finance the purchase of high-quality asset-backed commercial paper (ABCP) from money market mutual funds. On October 7, the Board announced the creation of the Commercial Paper Funding Facility (CPFF), which provides a liquidity backstop to U.S. issuers of highly rated commercial paper through a special-purpose vehicle that purchases three-month unsecured commercial paper and ABCP directly from eligible issuers. On October 21, it publicized the creation of the Money Market Investor Funding Facility (MMIFF), under which the Federal Reserve Bank of New York will provide funding to a series of special-purpose vehicles to facilitate an industry-supported initiative to finance the purchase of certain highly rated certificates of deposit, bank notes, and commercial paper from U.S. money market mutual funds. The AMLF, CPFF, and MMIFF were intended to improve the liquidity in short-term debt markets and ease the strains in credit markets more broadly. In addition, to address the sizable demand for dollar funding in foreign jurisdictions, the FOMC authorized the expansion of its existing swap lines with the European Central Bank and Swiss National Bank; by the end of the intermeeting period, the formal quantity limits on these lines had been eliminated. The quantity limits were also lifted on new swap lines set up with the Bank of Japan and the Bank of England. The FOMC authorized new swap lines with five other central banks during the period. In domestic markets, the Federal Reserve raised the regular auction amounts of the 28- and 84-day maturity Term Auction Facility (TAF) auctions to $150 billion each. Also, the Federal Reserve announced two forward TAF auctions for $150 billion each, to be conducted in November to provide funding over year-end. In total, up to $900 billion of TAF credit over year-end was authorized. Despite the substantial provision of liquidity by the Federal Reserve and other central banks, functioning in many credit markets remained very poor, a situation that reflected market participants' uncertainty about their liquidity needs and their future access to funding as well as concerns about the health of many financial institutions. To strengthen confidence in U.S. financial institutions, the Treasury, the Federal Reserve, and the Federal Deposit Insurance Corporation (FDIC) issued a joint statement on October 14, which included several elements. First, the Treasury announced a voluntary capital purchase plan under which eligible financial institutions could sell preferred shares to the U.S. government. Second, the FDIC provided a temporary guarantee of the senior unsecured debt of all FDIC-insured institutions and their holding companies, as well as all balances in non-interest-bearing transaction deposit accounts. The statement included notice that nine major financial institutions had agreed to participate in both the capital purchase program and the FDIC guarantee program. Third, the Federal Reserve announced details of the CPFF, which was scheduled to begin on October 27. After this joint statement and the announcements of similar programs in a number of other countries, financial market pressures appeared to ease somewhat, though conditions remained strained. The expansion of existing liquidity facilities as well as the creation of new facilities contributed to a notable increase in the size of the Federal Reserve's balance sheet. The amount of primary credit outstanding rose considerably over the intermeeting period, with both foreign and domestic depository institutions making use of the discount window. TAF credit outstanding more than doubled over the period. Credit extended through the Primary Dealer Credit Facility rose rapidly ahead of quarter-end; although it subsided subsequently, the amount of credit outstanding remained well above the levels seen before mid-September. The Term Securities Lending Facility (TSLF) auctions conducted over the intermeeting period had very high demand; in addition, dealers exercised most of the options for TSLF loans spanning the September quarter-end. Two initiatives were introduced over the intermeeting period to help manage the expansion of the balance sheet and promote control of the federal funds rate. First, on September 17, the Treasury announced a temporary Supplementary Financing Program at the request of the Federal Reserve. Under this program, the Treasury issued short-term bills over and above its regular borrowing program, with the proceeds deposited at the Federal Reserve. This facility helped offset the provision of reserves to the banking system through the various liquidity facilities. Second, employing authority granted under the Emergency Economic Stabilization Act, the Federal Reserve Board announced on October 6 that it would pay interest on required and excess reserve balances beginning on October 9. The payment of interest on excess reserve balances was intended to assist in maintaining the federal funds rate close to the target set by the Committee. Initially, the interest rate on required reserves was set at the average target federal funds rate over each reserve maintenance period less 10 basis points, while the rate on excess reserves was set at the lowest target federal funds rate over each reserve maintenance period less 75 basis points. On October 22, the rate on excess reserves was adjusted to be the lowest target federal funds rate during the maintenance period less 35 basis points. In the forecast prepared for the meeting, the staff lowered its projection for economic activity in the second half of 2008 as well as in 2009 and 2010. Real GDP appeared to have declined in the third quarter, and the few available indicators that reflected conditions following the intensification of the financial market turmoil in mid-September pointed to another decline in the fourth quarter. The declines in stock-market wealth, low levels of consumer sentiment, weakened household balance sheets, and restrictive credit conditions were likely to hinder household spending over the near term. Business expenditures also probably would be held back by a weaker sales outlook and tighter credit conditions. The staff expected that real GDP would continue to contract somewhat in the first half of 2009 and then rise in the second half, with the result that real GDP would be about unchanged for the year. Although futures markets pointed to a lower trajectory for oil prices than at the time of the September meeting, real activity was expected to be restrained by further contraction in residential investment, reduced household wealth, continued tight credit conditions, and a deterioration of foreign economic performance. In 2010, real GDP growth was expected to pick up to near the rate of potential growth, as the restraints on household and business spending from the financial market tensions were anticipated to begin to ease and the contraction in the housing market to come to an end. With growth below its potential rate for an extended period, the unemployment rate was expected to rise significantly through early 2010. The staff reduced its forecast for both core and overall PCE inflation, as the disinflationary effects of the receding cost pressures of energy, materials, and import prices and of resource slack were expected to be greater than at the time of the September FOMC meeting. Core inflation was projected to slow considerably in 2009 and then to edge down further in 2010. In conjunction with this FOMC meeting, all participants--that is, Federal Reserve Board members and Reserve Bank presidents--provided annual projections for economic growth, the unemployment rate, and inflation for the period 2008 through 2011. The projections are described in the Summary of Economic Projections, which is attached as an addendum to these minutes. In their discussion of the economic situation and outlook, FOMC meeting participants indicated that the worsening financial situation, the slowdown in growth abroad, and incoming information on economic activity had led them to mark down significantly their outlook for growth. While economic activity had evidently already been slowing over the summer, the turmoil in recent weeks had apparently resulted in tighter financial conditions and greater uncertainty among businesses and households about economic prospects, further limiting their ability and willingness to make significant spending commitments. Recent measures of business and consumer sentiment had fallen to historical lows. Participants generally expected the economy to contract moderately in the second half of 2008 and the first half of 2009, and agreed that the downside risks to growth had increased. While some expected an improving financial situation to contribute to a recovery in growth by mid-2009, others judged that the period of economic weakness could persist for some time. Several participants indicated that they expected some fiscal stimulus in coming quarters, but they were uncertain about the extent and duration of the resulting support to economic activity. Participants agreed that in coming quarters inflation was likely to move down to levels consistent with price stability, reflecting the recent declines in the prices of energy and other commodities, the appreciation of the dollar, and the expected widening of margins of resource slack. Indeed, some saw a risk that over time inflation could fall below levels consistent with the Federal Reserve's dual objectives of price stability and maximum employment. Participants noted that financial conditions had worsened significantly over the intermeeting period. The failure or near failure of a number of major financial institutions had deepened market concerns about counterparty credit risk and liquidity risk. As a result, financial intermediaries had cut back on lending to some counterparties, particularly for terms beyond overnight, and in general were conserving liquidity and capital. Moreover, risk aversion of investors increased, driving credit spreads sharply higher. Survey results and anecdotal information also suggested that credit conditions had tightened significantly further for businesses and households. Equity prices had varied widely and were substantially lower, on net. Participants saw the potential for financial strains to intensify if some investors, such as hedge funds, found it necessary to sell assets and as lending institutions built reserves against losses. Participants were concerned that the negative spiral in which financial strains lead to weaker spending, which in turn leads to higher loan losses and a further deterioration in financial conditions, could persist for a while longer. While the global efforts to recapitalize banks and guarantee deposits had helped stabilize the situation, risk spreads remained higher, asset prices lower, and credit conditions tighter than prior to the recent disruptions. Moreover, some participants noted that the specifics and effectiveness of some government programs to support financial markets and institutions remained unclear. Participants indicated that the increase in financial turmoil had already had an impact on business decisions. Reports from contacts in many parts of the country suggested that the weaker and less certain economic outlook was leading businesses to cancel capital and other discretionary expenditures and lay off workers. Several participants noted that even businesses that had previously been largely unaffected by the financial turbulence were now experiencing difficulties obtaining new credit, and some businesses were said to be drawing down lines of credit preemptively rather than risk the lines becoming unavailable. Contacts indicated that fewer commercial real estate construction projects were being undertaken. Residential construction activity remained extremely subdued, with the stock of unsold homes still very elevated. Meeting participants noted that real consumer spending had been weakening through the summer, responding to lower employment and tighter credit. Moreover, households, like businesses, were reportedly reacting to the shifting economic circumstances in recent weeks by cutting expenditures further. Spending on consumer durables, such as automobiles, and discretionary items had been particularly hard hit, and retailers anticipated very weak holiday spending. Participants noted that the financial turmoil had increasingly become an international phenomenon, leading to a marked deterioration in global growth prospects. While advanced foreign economies had already shown signs of slowing, they had been significantly affected by the worsening of financial strains over the intermeeting period. Moreover, a number of emerging market economies, which had heretofore been less influenced by the financial developments in industrial countries, had in recent weeks been significantly affected, as the increasing strains in financial markets led global investors to pull back from exposures to such economies. As a result, interest rates on emerging market debt had shot up and prices of emerging market equity had dropped sharply. Participants saw the stronger dollar and weaker growth abroad as likely to restrain future growth in U.S. exports. Participants agreed that inflation was likely to diminish materially in coming quarters. Commodity prices had fallen sharply, the dollar had strengthened notably, and considerable economic slack was anticipated. Moreover, some survey measures of inflation expectations had declined as had those derived from inflation-linked Treasury securities, although recent movements in the latter measures were likely influenced in part by increases in the premiums required to hold the relatively illiquid inflation-indexed securities. Some participants indicated that their business contacts had reported reduced pricing power and lower markups. Against this backdrop, participants generally expected inflation to decline to levels consistent with price stability. A few participants noted that disruptions to the credit intermediation process and the inefficiencies associated with shifts of resources among economic sectors could be expected to reduce aggregate supply as well as restrain aggregate demand; as a consequence, such factors could limit the effect of slower output growth on rates of resource slack and inflation. Others, though, saw a risk that if resource utilization remained weak for some time, inflation could fall below levels consistent with the Federal Reserve's dual mandate for promoting price stability and maximum employment, a development that would pose important policy challenges in light of the already-low level of the Committee's federal funds rate target. Participants discussed a number of issues relating to broader monetary policy strategy. Over the past year, the Federal Reserve's response to the financial turbulence had encompassed substantial monetary policy easing, the provision of large volumes of liquidity through standard and extraordinary means, and facilitating the resolution of troubled, systemically important financial institutions. Participants judged that the policy actions had been helpful and well calibrated to their assessment of the developing situation. Several participants observed that it would be crucial for such policy actions to be unwound appropriately as the financial situation normalized. However, participants also observed that unfolding economic developments could require the FOMC to further lower its target for the federal funds rate in the future and to review the adequacy of its liquidity facilities. In the discussion of monetary policy for the intermeeting period, Committee members agreed that significant easing in policy was warranted at this meeting in view of the marked deterioration in the economic outlook and anticipated reduction in inflation pressures. The recent substantial tightening in financial conditions, the sharp downshift in spending here and abroad, and the rapid abatement of upside inflation risks all suggested that a forceful policy response would be appropriate. Some members were concerned that the effectiveness of cuts in the target federal funds rate may have been diminished by the financial dislocations, suggesting that further policy action might have limited efficacy in promoting a recovery in economic growth. And some also noted that the Committee had limited room to lower its federal funds rate target further and should therefore consider moving slowly. However, others maintained that the possibility of reduced policy effectiveness and the limited scope for reducing the target further were reasons for a more aggressive policy adjustment; an easing of policy should contribute to a beneficial reduction in some borrowing costs, even if a given rate reduction currently would elicit a smaller effect than in more typical circumstances, and more aggressive easing should reduce the odds of a deflationary outcome. Members also saw the substantial downside risks to growth as supporting a relatively large policy move at this meeting, though even after today's 50 basis point action, the Committee judged that downside risks to growth would remain. Members anticipated that economic data over the upcoming intermeeting period would show significant weakness in economic activity, and some suggested that additional policy easing could well be appropriate at future meetings. In any event, the Committee agreed that it would take whatever steps were necessary to support the recovery of the economy. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee in the immediate future seeks conditions in reserve markets consistent with reducing the federal funds rate to an average of around 1 percent." The vote encompassed approval of the statement below to be released at 2:15 p.m.: "The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 1 percent. The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures. Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit. In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate in coming quarters to levels consistent with price stability. Recent policy actions, including today's rate reduction, coordinated interest rate cuts by central banks, extraordinary liquidity measures, and official steps to strengthen financial systems, should help over time to improve credit conditions and promote a return to moderate economic growth. Nevertheless, downside risks to growth remain. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability." Votes for this action: Messrs. Bernanke and Geithner, Ms. Duke, Messrs. Fisher, Kohn, and Kroszner, Ms. Pianalto, Messrs. Plosser, Stern, and Warsh. Votes against this action: None. It was agreed that the next meeting of the Committee would be held on Tuesday, December 16, 2008. The meeting adjourned at 11:45 a.m. Conference CallsOn September 29, 2008, the Committee met by conference call to review recent developments and to consider changes to swap arrangements with foreign central banks. Amid signs of growing strains in money markets, the discussion focused on recent Federal Reserve actions and on potential expansions in official liquidity facilities. In light of severe pressures in dollar funding markets abroad, the Committee unanimously approved both extending the liquidity-related swap arrangements with foreign central banks an additional three months, through April 30, 2009, and increasing substantially the sizes of those existing arrangements. The enlarged facilities would support the provision of U.S. dollar liquidity in amounts of up to $30 billion by the Bank of Canada, $80 billion by the Bank of England, $120 billion by the Bank of Japan, $15 billion by Danmarks Nationalbank, $240 billion by the European Central Bank, $15 billion by the Norges Bank, $30 billion by the Reserve Bank of Australia, $30 billion by Sveriges Riksbank, and $60 billion by the Swiss National Bank. In addition, the Committee was briefed on plans for implementation of a provision in pending legislation that would allow the Federal Reserve to begin immediately to pay interest on reserves held by depository institutions, and on the proposed acquisition of Wachovia by Citigroup. On October 7, 2008, the Committee again met by conference call. Stresses in financial markets had continued to increase: Interest-rate spreads in interbank funding markets had widened markedly, corporate and municipal bond yields had risen, and equity prices had dropped sharply. For the first time in many years, the net asset value of a major money market fund had fallen below $1 per share; this event sparked a flight out of prime money market funds and caused a severe impairment of the functioning of the commercial paper market. Since the September 16 FOMC meeting, indicators of economic activity in both the United States and in major foreign countries had come in weaker than expected. In the United States, automobile sales, capital goods shipments, and private payrolls had fallen notably. Elsewhere, indicators of economic activity and sentiment had deteriorated in a broad range of important foreign economies. Prices of crude oil and other commodities had dropped substantially, and some measures of inflation expectations had declined. Participants agreed that downside risks to economic growth had increased and upside risks to inflation had diminished. Participants discussed the considerable expansion of Federal Reserve liquidity in recent months. Most agreed that these actions to provide liquidity had had a beneficial impact. Nonetheless, financial conditions were exerting considerable restraint on economic activity. All members judged that a significant easing in policy at this time was appropriate to foster moderate economic growth and to reduce the downside risks to economic activity. Members also welcomed the opportunity to coordinate this policy action with similar measures by the Bank of Canada, the Bank of England, the European Central Bank, Sveriges Riksbank, and the Swiss National Bank. By showing that policymakers around the globe were working closely together, had a similar view of global economic conditions, and were willing to take strong actions to address those conditions, coordinated action could help to bolster consumer and business confidence and so yield greater economic benefits than unilateral action. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee in the immediate future seeks conditions in reserve markets consistent with reducing the federal funds rate to an average of around 1-1/2 percent." The vote encompassed approval of the statement below: "The Federal Open Market Committee has decided to lower its target for the federal funds rate 50 basis points to 1-1/2 percent. The Committee took this action in light of evidence pointing to a weakening of economic activity and a reduction in inflationary pressures. Incoming economic data suggest that the pace of economic activity has slowed markedly in recent months. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit. Inflation has been high, but the Committee believes that the decline in energy and other commodity prices and the weaker prospects for economic activity have reduced the upside risks to inflation. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability." Votes for this action: Messrs. Bernanke and Geithner, Ms. Duke, Messrs. Fisher, Kohn, and Kroszner, Ms. Pianalto, Messrs. Plosser, Stern, and Warsh. Votes against this action: None. Notation VotesBy notation vote completed September 21, 2008 the Committee unanimously approved the following resolution: "The FOMC amends paragraph 1.A. of the Authorization for Foreign Currency Operations to include Australian dollars in the list of foreign currencies in which the Federal Reserve Bank of New York may transact for the System Open Market Account." By notation vote completed on October 6, 2008, the Committee unanimously approved the minutes of the FOMC meeting held on September 16, 2008. By notation vote completed October 11, 2008 the Committee unanimously approved the following resolution: "The Federal Open Market Committee authorizes the Federal Reserve Bank of New York (FRBNY) to increase the amounts available from the System Open Market Account under the existing reciprocal currency arrangements ("swap" arrangements) with the Bank of England, the European Central Bank, the Bank of Japan, and the Swiss National Bank to meet the amounts requested by those central banks in connection with their fixed-rate tender auctions. The FRBNY must report to the Committee each time the aggregate draws by one of these central banks increases the level outstanding for that bank by an increment of $200 billion over the level outstanding on October 10, 2008." _____________________________ Brian F. MadiganSecretary 1. Attended Wednesday's session only. Return to text Return to top

2008-10-29

Statement

The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 1 percent. The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures. Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit. In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate in coming quarters to levels consistent with price stability. Recent policy actions, including today’s rate reduction, coordinated interest rate cuts by central banks, extraordinary liquidity measures, and official steps to strengthen financial systems, should help over time to improve credit conditions and promote a return to moderate economic growth. Nevertheless, downside risks to growth remain. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability. Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. In a related action, the Board of Governors unanimously approved a 50-basis-point decrease in the discount rate to 1-1/4 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, Cleveland, and San Francisco.

2008-10-07

Statement

Joint Statement by Central Banks Throughout the current financial crisis, central banks have engaged in continuous close consultation and have cooperated in unprecedented joint actions such as the provision of liquidity to reduce strains in financial markets. Inflationary pressures have started to moderate in a number of countries, partly reflecting a marked decline in energy and other commodity prices. Inflation expectations are diminishing and remain anchored to price stability. The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability.  Some easing of global monetary conditions is therefore warranted. Accordingly, the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, Sveriges Riksbank, and the Swiss National Bank are today announcing reductions in policy interest rates. The Bank of Japan expresses its strong support of these policy actions. Federal Reserve ActionsThe Federal Open Market Committee has decided to lower its target for the federal funds rate 50 basis points to 1-1/2 percent. The Committee took this action in light of evidence pointing to a weakening of economic activity and a reduction in inflationary pressures.  Incoming economic data suggest that the pace of economic activity has slowed markedly in recent months. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit. Inflation has been high, but the Committee believes that the decline in energy and other commodity prices and the weaker prospects for economic activity have reduced the upside risks to inflation.  The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.  Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh.  In a related action, the Board of Governors unanimously approved a 50-basis-point decrease in the discount rate to 1-3/4 percent.  In taking this action, the Board approved the request submitted by the Board of Directors of the Federal Reserve Bank of Boston. Information on Actions Taken by Other Central BanksInformation on the actions that will be taken by other central banks is available at the following websites: Bank of Canada   Bank of England  European Central Bank Sveriges Riksbank (Bank of Sweden) Swiss National Bank (68 KB PDF)  Statements by Other Central BanksBank of Japan (79 KB PDF)

N/A

Minute

A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, October 28, 2008 at 2:00 p.m. and continued on Wednesday, October 29, 2008 at 9:00 a.m. PRESENT:Mr. Bernanke, ChairmanMr. Geithner, Vice ChairmanMs. DukeMr. FisherMr. KohnMr. KrosznerMs. PianaltoMr. PlosserMr. SternMr. Warsh Ms. Cumming, Messrs. Evans, Lacker, and Lockhart, and Ms. Yellen, Alternate Members of the Federal Open Market Committee Messrs. Bullard, Hoenig, and Rosengren, Presidents of the Federal Reserve Banks of St. Louis, Kansas City, and Boston, respectively Mr. Madigan, Secretary and EconomistMs. Danker, Deputy SecretaryMr. Skidmore, Assistant SecretaryMs. Smith, Assistant SecretaryMr. Alvarez, General CounselMr. Baxter, Deputy General CounselMr. Sheets, Economist Mr. Stockton, Economist Messrs. Connors, English, and Kamin, Ms. Mester, Messrs. Rosenblum, Slifman, Sniderman, and Wilcox, Associate Economists Mr. Dudley, Manager, System Open Market Account Ms. Bailey, Deputy Director, Division of Banking Supervision and Regulation, Board of Governors Mr. Clouse, Deputy Director, Division of Monetary Affairs, Board of Governors Mr. Struckmeyer,1 Deputy Staff Director, Office of Staff Director for Management, Board of Governors Mr. Blanchard, Assistant to the Board, Office of Board Members, Board of Governors Messrs. Reifschneider and Wascher, Associate Directors, Division of Research and Statistics, Board of Governors Messrs. Levin and Nelson, Associate Directors, Division of Monetary Affairs, Board of Governors Ms. Kole, Assistant Director, Division of International Finance, Board of Governors Mr. McCarthy, Visiting Reserve Bank Officer, Division of Monetary Affairs, Board of Governors Mr. Oliner, Senior Adviser, Division of Research and Statistics, Board of Governors Mr. Small, Project Manager, Division of Monetary Affairs, Board of Governors Messrs. Bassett and Luecke, Section Chiefs, Division of Monetary Affairs, Board of Governors Mr. Morin, Senior Economist, Division of Research and Statistics, Board of Governors Ms. Low, Open Market Secretariat Specialist, Division of Monetary Affairs, Board of Governors Mr. Moore, First Vice President, Federal Reserve Bank of Cleveland Mr. Fuhrer, Executive Vice President, Federal Reserve Bank of Boston Messrs. Altig and McAndrews, Ms. Mosser, Messrs. Rasche, Sullivan, and Williams, Senior Vice Presidents, Federal Reserve Banks of Atlanta, New York, New York, St. Louis, Chicago, and San Francisco, respectively Messrs. Clark and Hornstein, Vice Presidents, Federal Reserve Banks of Kansas City and Richmond, respectively Mr. Weber, Senior Research Officer, Federal Reserve Bank of Minneapolis The Manager of the System Open Market Account reported on recent developments in foreign exchange markets. There were no open market operations in foreign currencies for the System's account in the period since the previous meeting. The Manager also reported on developments in domestic financial markets and on System open market operations in government securities and federal agency obligations during the period since the previous meeting. By unanimous vote, the Committee ratified these transactions. In the discussion of System open market operations over the period, it was noted that reserve management had become more complex as a result of the large provision of reserves associated with the recent expansion of the Federal Reserve's liquidity facilities; in particular, the effective federal funds rate had been persistently below the FOMC's target. While the payment of interest on reserves seemed to be helpful in mitigating downward pressure on the funds rate, a number of institutions evidently were willing to sell funds at interest rates below that paid on excess reserve balances. Anecdotal reports suggested that this was particularly the case for those institutions that are not eligible to receive interest on the balances they maintain at the Federal Reserve. Going forward, however, the interest rate on excess reserve balances could be adjusted, and it might establish a more effective floor on the federal funds rate over time as more depository institutions revise their strategies in the federal funds market in light of the payment of interest on reserves. In view of a further widening in financial market strains internationally, the Committee considered proposals to establish temporary reciprocal currency ("swap") arrangements with several additional foreign central banks. Members unanimously approved the following resolution, which effectively permitted the Foreign Currency Subcommittee to establish a swap line with the Reserve Bank of New Zealand. "The FOMC amends paragraph 1.A. of the Authorization for Foreign Currency Operations to include the New Zealand dollar in the list of foreign currencies in which the Federal Reserve Bank of New York may transact for the System Open Market Account." Meeting participants also discussed a proposal to set up temporary liquidity-related swap arrangements with the central banks of Mexico, Brazil, Korea, and Singapore. In their remarks, participants focused on the outlook for complementarity between these swaps and the new short-term liquidity facility that the International Monetary Fund was considering; on the governance and structure of the swap lines; and on the particular countries included. Several participants pointed to the international reserves held by the countries and the importance of ensuring that these temporary swap lines, like the others that had been established during this period, be used only for the purposes intended. On balance, the Committee concluded that in current circumstances the swap arrangements with these four large and systemically important economies were appropriate, and it unanimously approved the following resolutions. "The FOMC directs the Federal Reserve Bank of New York to establish and maintain a reciprocal currency arrangement ("swap arrangement") for the System Open Market Account with each of (i) the Banco Central do Brasil, (ii) the Bank of Korea, (ii) the Banco de Mexico, and (iv) the Monetary Authority of Singapore. Each such swap arrangement would be for an aggregate amount not to exceed $30 billion. Drawings under the arrangement require approval. Unless extended by the Committee, each such swap arrangement shall expire on April 30, 2009. The FOMC amends paragraph 1.A. of the Authorization for Foreign Currency Operations to include the Brazilian real, the Korean won, and the Singapore dollar in the list of foreign currencies in which the Federal Reserve Bank of New York may transact for the System Open Market Account. The FOMC delegates to the Foreign Currency Subcommittee the authority to approve individual drawing requests of up to $5 billion under each of the aforementioned swap arrangements with the Banco Central do Brasil, the Bank of Korea, the Banco de Mexico, and the Monetary Authority of Singapore." A number of adverse financial developments influenced economic and financial market conditions over the intermeeting period. Lehman Brothers Holdings had filed for bankruptcy the day before the meeting of the Committee in September. In large part because of losses on Lehman debt, the net asset value of a major money market mutual fund fell below $1 per share, spurring a substantial outflow from money market mutual funds and straining their liquidity. The rapid deterioration of American International Group, Inc. (AIG), and Wachovia Corporation, along with the closing of Washington Mutual, led to intensified market concerns about the condition of financial institutions. In this environment, investors pulled back from risk-taking, funding markets for terms beyond overnight largely ceased to function at times, credit risk spreads rose sharply, and equity prices registered steep declines. The information reviewed at the October meeting indicated that economic conditions deteriorated in recent months. The labor market weakened further in September as private payrolls fell at a faster pace than earlier in the year and the unemployment rate remained above 6 percent. Industrial production fell in September, although much of the drop was related to effects of recent hurricanes and a strike at an aircraft manufacturer. Consumer spending declined, reflecting stagnant real income, tighter credit, declining wealth, and concerns about economic conditions. The housing market remained weak, with construction activity, new home sales, and home prices falling further. Business spending on equipment and software appeared to have declined again in the third quarter, and indicators of investment in structures weakened. Economic activity in many foreign economies slowed in recent months. Headline consumer inflation measures, pulled down by declines in consumer energy prices, moderated in August and September. Core consumer inflation measures also eased somewhat in these two months. The labor market continued to weaken. According to the September labor market report, the unemployment rate remained at 6.1 percent, but private payroll employment fell faster than the average pace earlier in the year. Most major industry groups shed jobs. The manufacturing, construction, and temporary help industries continued to experience sizable losses in employment; meanwhile, retail trade and financial services registered larger declines than earlier in the year. Nonbusiness services added jobs, but at the slowest rate of the year. The average workweek and aggregate hours declined in September, and weekly unemployment insurance claims continued to rise in October. Industrial production dropped sharply in September. Although much of the decline was due to the effects of the recent hurricanes and a strike at an aircraft manufacturer, most major industries experienced slow or declining output in recent months. Motor vehicle assemblies were unchanged in the third quarter at a low level. The pace of high-tech equipment production slowed in the third quarter relative to its rate in the first half of the year, reportedly in part because tight credit conditions were restraining demand. Available information suggested that demand and production in this sector were likely to remain relatively subdued over the coming months. The output of other manufacturing sectors declined in the third quarter. While standard indicators of near-term production suggested factory output would decline further over the next few months, the recovery of production in industries affected by the hurricanes was expected to offset these declines to a degree. The factory utilization rate fell in September to well below its long-run average. Real personal consumption expenditures (PCE) apparently declined in September for the fourth consecutive month. Motor vehicle sales fell back to their very low July pace, and preliminary reports indicated that the slump continued into October, as tighter credit conditions were restraining demand. Purchases of goods other than motor vehicles were estimated to have fallen noticeably. Real outlays on services other than energy increased only modestly in July and August. Real disposable income, excluding the effects of tax rebates and the emergency unemployment benefits, was little changed in July and August from the second-quarter average. Measures of consumer sentiment dropped in October to near or below their low levels of midyear, with the Conference Board measure exceptionally low. Residential construction activity continued to decline steeply through the third quarter. In September, both single-family housing starts and permit issuance fell. In the multifamily sector, starts edged up in September but remained toward the lower end of their two-year range. New home sales in August and September were at a pace well below that of the first half of the year. Although the cutbacks in homebuilding had reduced the inventory of unsold houses, the slower rate of sales kept the months' supply of new homes very elevated relative to the level that had prevailed before the downturn in the housing market. Sales of existing single-family homes in September were somewhat higher than they had been earlier in the year, likely supported by increases in foreclosure-related sales. Tight conditions in mortgage markets continued to restrain housing demand, especially for borrowers needing nonconforming mortgages. Several indexes indicated that house prices declined substantially over the 12 months through August. In the business sector, investment in equipment and software appeared to weaken further in the third quarter. Nominal shipments of nondefense capital goods excluding aircraft were flat in the third quarter, while orders for those goods declined. Demand for high-tech equipment appeared to have softened considerably, and spending on non-high-tech, non-transportation equipment was estimated to have fallen. Transportation equipment investment was held down in the third quarter by falling sales for medium and heavy trucks and by a strike-induced drop in aircraft deliveries in September. Nominal expenditures on nonresidential structures declined for the second consecutive month in August. Forward-looking indicators turned more downbeat: Vacancy rates for commercial properties rose further, property values declined, and the architectural billings index fell in September. Furthermore, the latest Senior Loan Officer Opinion Survey on Bank Lending Practices indicated that banks tightened lending standards for commercial real estate loans over the past three months. The book-value data for manufacturing and trade inventories suggested that the real value of inventories continued to decline over the summer through August, but a number of indicators suggested that stocks in some industries remained above desired levels. The days' supply of light motor vehicles at dealers had risen, on balance, through the year and was rather high in September. The ratio of book-value inventories to sales in the manufacturing and trade sectors, excluding motor vehicles, rose in August, particularly in a number of durable goods sectors. In addition, the index of customers' inventories in the Institute of Supply Management's manufacturing survey indicated that inventories remained above desired levels. The U.S. international trade deficit narrowed in August, with a decline in the value of imports more than offsetting a fall in the value of exports of goods and services. A drop in the value of petroleum imports, which reflected both lower volumes and a decrease in prices, exceeded an increase in non-oil imports that was driven by a rise in imports of consumer goods and industrial supplies. Exports of automotive products fell sharply in August after a surge in July, and exports of consumer goods, industrial supplies, and services moved down after strong increases in previous months. Aircraft exports surged, but sales of other capital goods declined. The data for the advanced foreign economies during the intermeeting period generally suggested that economic activity was weakening further, and confidence indicators in these areas declined as the financial crisis worsened. Labor market conditions deteriorated in these economies, with the exception of Canada. Real gross domestic product (GDP) fell in the United Kingdom in the third quarter. Headline inflation continued to be elevated in many economies, but the most recent consumer price indexes for Japan and for the euro area suggested some deceleration in prices. In emerging market economies, data received over the intermeeting period showed a continued slowing of real activity. Real GDP growth in China moved down in the third quarter. Industrial production contracted in recent months for many countries. External balances deteriorated significantly in many emerging market economies as exports to advanced economies slowed. Headline inflation in emerging market economies eased, reflecting falling oil and food prices. Headline consumer prices in the United States were estimated to have risen only modestly in September, extending the recent moderation of overall inflation following the rapid increases earlier in the year. Consumer energy prices fell for the second consecutive month, while retail food prices continued to climb at a rapid pace, boosted by the substantial run-up in farm commodity prices through midyear. Core consumer price inflation rose somewhat during the third quarter, reflecting the pass-through of previous increases in the costs of energy and materials and import prices. Those upward price pressures diminished recently: Prices of oil and other commodities fell sharply over the intermeeting period, and non-oil import prices as well as producer prices of intermediate materials excluding food and energy declined in September. Some survey measures of inflation expectations declined during the period. Available measures of hourly labor compensation increased at about the same moderate pace as over the past several years. At its September meeting, the Federal Open Market Committee (FOMC) kept the target federal funds rate unchanged at 2 percent. The Committee's statement noted that strains in financial markets had increased significantly and that labor markets had weakened further. Economic growth appeared to have slowed recently, which partly reflected a softening of household spending. Tight credit conditions, the ongoing housing contraction, and some slowing in export growth were likely to weigh on economic growth over the next few quarters. The Committee stated that, over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help promote moderate economic growth. Inflation had been high, spurred by the earlier increases in the prices of energy and some other commodities. The Committee expected inflation to moderate later this year and next year, but the inflation outlook remained highly uncertain. The downside risks to growth and the upside risks to inflation were both of significant concern to the Committee. The Committee indicated that it would continue to monitor economic and financial developments carefully and would act as needed to promote sustainable economic growth and price stability. Over the intermeeting period, market participants marked down their expectations for the path of the federal funds rate for the next two years. The Committee's decision to leave the target federal funds rate unchanged at the September FOMC meeting led some investors to scale back expectations for policy easing over the next year. Subsequently, however, market expectations reversed in response to the heightened financial turmoil and to generally weaker-than-expected economic data. The Committee's decision to reduce the target federal funds rate 50 basis points as part of a coordinated action with other central banks on October 8, along with the accompanying statement, led investors to mark down further the expected path for the federal funds rate. Yields on short-term nominal Treasury coupon securities declined over the intermeeting period, reportedly as a result of substantial flight-to-quality flows and heightened demand for liquidity. In contrast, higher term premiums and expectations of increases in the supply of Treasury securities associated with the Emergency Economic Stabilization Act and other initiatives seemed to put upward pressure on longer-term nominal Treasury yields. Yields on longer-term inflation-indexed Treasury securities, which are relatively illiquid, rose more sharply than did those on nominal securities. Measures of inflation compensation based on differences between nominal and inflation-indexed Treasury yields were quite volatile over the intermeeting period and, because of shifting liquidity premiums, likely provided less information than usual concerning inflation expectations or inflation uncertainty. In the wake of the failures or near failures of several large financial institutions, short-term funding markets came under significant additional pressure over the intermeeting period, and the Federal Reserve and other central banks took a number of actions to provide liquidity and improve market functioning. In the overnight federal funds market, financial institutions became more selective about the counterparties with whom they were willing to trade. The overnight London interbank offered rate (Libor) rose substantially, and the spread of term Libor rates over comparable-maturity overnight index swap (OIS) rates rose sharply from already-high levels. The demand for commercial paper declined as prime money market mutual funds experienced large net outflows after the net asset value of one such fund fell below $1 per share. As a consequence, risk spreads on commercial paper rose considerably and were very volatile. Amid strong flows into government-only money market mutual funds, the demand for short-dated Treasury bills rose, and these securities traded with very low yields despite sizable new issuance during the period. The market for repurchase agreements (repos) also experienced significant dislocations during the intermeeting period. Partly because of high demand for Treasury securities, the overnight repo rate for Treasury general collateral was near zero for much of the period, and failures to deliver Treasury securities reached record highs. Repo rates on agency collateral also were volatile, and liquidity in non-Treasury, non-agency repo markets was poor. Conditions in short-term funding markets improved somewhat following the announcements of a U.S. government guarantee of certain liabilities of U.S. banking organizations and similar actions by foreign authorities, the expansion of swap arrangements between the Federal Reserve and other central banks, and a number of initiatives by the Federal Reserve and the Treasury to address the pressures on money market mutual funds and the commercial paper market. In longer-term credit markets, yields and spreads on investment-grade and speculative-grade corporate bonds increased, while indexes of credit default swap (CDS) spreads for investment-grade financial and nonfinancial firms reached unprecedented levels. Liquidity in the corporate bond and CDS markets was strained. Issuance of investment-grade corporate bonds was moderate in September and October, while there was little issuance of speculative-grade bonds. Commercial and industrial loans continued to expand rapidly in early October, as firms drew on existing bank lines of credit. However, conditions deteriorated in the secondary market for syndicated leveraged loans, with prices falling to new lows and bid-asked spreads widening notably. Broad equity price indexes declined sharply over the intermeeting period, and option-implied volatility on the S&P 500 index rose well above its previous record high. The Senior Loan Officer Opinion Survey pointed to further tightening of terms and standards for consumer loans. Consumer credit increased at its slowest pace in more than 15 years during the three months ending in August. Conditions in the municipal bond market were also poor over much of the intermeeting period. The strains from the banking and credit crisis intensified and took on a more global aspect over the intermeeting period. This development and the related erosion of the economic outlook and reduction in inflationary pressures led many central banks to reduce their policy rates, including in the internationally coordinated action announced on October 8. Liquidity conditions in the money markets of major foreign economies deteriorated further. Spreads between term Libor and OIS rates in euros and sterling rose from already-elevated levels, although by less than in dollars. Sovereign bond yields in the advanced foreign economies were volatile; nominal yield curves in many countries steepened on net. Equity market indexes fell sharply in the advanced economies as well as in emerging market economies, which until recently had not been hit as hard by the financial turmoil. The dollar appreciated against most currencies, with the prominent exception of the Japanese yen. In the United States, M2 accelerated sharply in September, and it appeared to be on pace for another large increase in October, apparently reflecting a heightened preference by households and firms for safe assets. Liquid deposits expanded strongly in September, but leveled off in early October. Small time deposits increased briskly in September and early October as banks and thrifts reportedly continued to bid aggressively for these deposits. Retail money funds, which were little changed in September, experienced significant net inflows in early October. In contrast, institutional money funds, which are not included in M2, experienced substantial outflows during this period. In response to the extraordinary stresses in financial markets, the Federal Reserve together with other U.S. government agencies and many foreign central banks and governments implemented a number of unprecedented policy initiatives during the intermeeting period. Early in the period, the condition of AIG, a large complex financial institution, deteriorated rapidly. In view of the likely systemic implications and the potential for significant adverse effects on the economy of a disorderly failure of AIG, the Federal Reserve Board on September 16, with the support of the Treasury, authorized the Federal Reserve Bank of New York to lend up to $85 billion to the firm to assist it in meeting its obligations and to facilitate the orderly sale of some of its businesses. On October 8, the Federal Reserve announced a supplemental liquidity arrangement for AIG. The Federal Reserve Board also approved a number of new facilities to address strains in short-term funding markets. On September 19, it announced the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), which extends nonrecourse loans at the primary credit rate to U.S. depository institutions and bank holding companies to finance the purchase of high-quality asset-backed commercial paper (ABCP) from money market mutual funds. On October 7, the Board announced the creation of the Commercial Paper Funding Facility (CPFF), which provides a liquidity backstop to U.S. issuers of highly rated commercial paper through a special-purpose vehicle that purchases three-month unsecured commercial paper and ABCP directly from eligible issuers. On October 21, it publicized the creation of the Money Market Investor Funding Facility (MMIFF), under which the Federal Reserve Bank of New York will provide funding to a series of special-purpose vehicles to facilitate an industry-supported initiative to finance the purchase of certain highly rated certificates of deposit, bank notes, and commercial paper from U.S. money market mutual funds. The AMLF, CPFF, and MMIFF were intended to improve the liquidity in short-term debt markets and ease the strains in credit markets more broadly. In addition, to address the sizable demand for dollar funding in foreign jurisdictions, the FOMC authorized the expansion of its existing swap lines with the European Central Bank and Swiss National Bank; by the end of the intermeeting period, the formal quantity limits on these lines had been eliminated. The quantity limits were also lifted on new swap lines set up with the Bank of Japan and the Bank of England. The FOMC authorized new swap lines with five other central banks during the period. In domestic markets, the Federal Reserve raised the regular auction amounts of the 28- and 84-day maturity Term Auction Facility (TAF) auctions to $150 billion each. Also, the Federal Reserve announced two forward TAF auctions for $150 billion each, to be conducted in November to provide funding over year-end. In total, up to $900 billion of TAF credit over year-end was authorized. Despite the substantial provision of liquidity by the Federal Reserve and other central banks, functioning in many credit markets remained very poor, a situation that reflected market participants' uncertainty about their liquidity needs and their future access to funding as well as concerns about the health of many financial institutions. To strengthen confidence in U.S. financial institutions, the Treasury, the Federal Reserve, and the Federal Deposit Insurance Corporation (FDIC) issued a joint statement on October 14, which included several elements. First, the Treasury announced a voluntary capital purchase plan under which eligible financial institutions could sell preferred shares to the U.S. government. Second, the FDIC provided a temporary guarantee of the senior unsecured debt of all FDIC-insured institutions and their holding companies, as well as all balances in non-interest-bearing transaction deposit accounts. The statement included notice that nine major financial institutions had agreed to participate in both the capital purchase program and the FDIC guarantee program. Third, the Federal Reserve announced details of the CPFF, which was scheduled to begin on October 27. After this joint statement and the announcements of similar programs in a number of other countries, financial market pressures appeared to ease somewhat, though conditions remained strained. The expansion of existing liquidity facilities as well as the creation of new facilities contributed to a notable increase in the size of the Federal Reserve's balance sheet. The amount of primary credit outstanding rose considerably over the intermeeting period, with both foreign and domestic depository institutions making use of the discount window. TAF credit outstanding more than doubled over the period. Credit extended through the Primary Dealer Credit Facility rose rapidly ahead of quarter-end; although it subsided subsequently, the amount of credit outstanding remained well above the levels seen before mid-September. The Term Securities Lending Facility (TSLF) auctions conducted over the intermeeting period had very high demand; in addition, dealers exercised most of the options for TSLF loans spanning the September quarter-end. Two initiatives were introduced over the intermeeting period to help manage the expansion of the balance sheet and promote control of the federal funds rate. First, on September 17, the Treasury announced a temporary Supplementary Financing Program at the request of the Federal Reserve. Under this program, the Treasury issued short-term bills over and above its regular borrowing program, with the proceeds deposited at the Federal Reserve. This facility helped offset the provision of reserves to the banking system through the various liquidity facilities. Second, employing authority granted under the Emergency Economic Stabilization Act, the Federal Reserve Board announced on October 6 that it would pay interest on required and excess reserve balances beginning on October 9. The payment of interest on excess reserve balances was intended to assist in maintaining the federal funds rate close to the target set by the Committee. Initially, the interest rate on required reserves was set at the average target federal funds rate over each reserve maintenance period less 10 basis points, while the rate on excess reserves was set at the lowest target federal funds rate over each reserve maintenance period less 75 basis points. On October 22, the rate on excess reserves was adjusted to be the lowest target federal funds rate during the maintenance period less 35 basis points. In the forecast prepared for the meeting, the staff lowered its projection for economic activity in the second half of 2008 as well as in 2009 and 2010. Real GDP appeared to have declined in the third quarter, and the few available indicators that reflected conditions following the intensification of the financial market turmoil in mid-September pointed to another decline in the fourth quarter. The declines in stock-market wealth, low levels of consumer sentiment, weakened household balance sheets, and restrictive credit conditions were likely to hinder household spending over the near term. Business expenditures also probably would be held back by a weaker sales outlook and tighter credit conditions. The staff expected that real GDP would continue to contract somewhat in the first half of 2009 and then rise in the second half, with the result that real GDP would be about unchanged for the year. Although futures markets pointed to a lower trajectory for oil prices than at the time of the September meeting, real activity was expected to be restrained by further contraction in residential investment, reduced household wealth, continued tight credit conditions, and a deterioration of foreign economic performance. In 2010, real GDP growth was expected to pick up to near the rate of potential growth, as the restraints on household and business spending from the financial market tensions were anticipated to begin to ease and the contraction in the housing market to come to an end. With growth below its potential rate for an extended period, the unemployment rate was expected to rise significantly through early 2010. The staff reduced its forecast for both core and overall PCE inflation, as the disinflationary effects of the receding cost pressures of energy, materials, and import prices and of resource slack were expected to be greater than at the time of the September FOMC meeting. Core inflation was projected to slow considerably in 2009 and then to edge down further in 2010. In conjunction with this FOMC meeting, all participants--that is, Federal Reserve Board members and Reserve Bank presidents--provided annual projections for economic growth, the unemployment rate, and inflation for the period 2008 through 2011. The projections are described in the Summary of Economic Projections, which is attached as an addendum to these minutes. In their discussion of the economic situation and outlook, FOMC meeting participants indicated that the worsening financial situation, the slowdown in growth abroad, and incoming information on economic activity had led them to mark down significantly their outlook for growth. While economic activity had evidently already been slowing over the summer, the turmoil in recent weeks had apparently resulted in tighter financial conditions and greater uncertainty among businesses and households about economic prospects, further limiting their ability and willingness to make significant spending commitments. Recent measures of business and consumer sentiment had fallen to historical lows. Participants generally expected the economy to contract moderately in the second half of 2008 and the first half of 2009, and agreed that the downside risks to growth had increased. While some expected an improving financial situation to contribute to a recovery in growth by mid-2009, others judged that the period of economic weakness could persist for some time. Several participants indicated that they expected some fiscal stimulus in coming quarters, but they were uncertain about the extent and duration of the resulting support to economic activity. Participants agreed that in coming quarters inflation was likely to move down to levels consistent with price stability, reflecting the recent declines in the prices of energy and other commodities, the appreciation of the dollar, and the expected widening of margins of resource slack. Indeed, some saw a risk that over time inflation could fall below levels consistent with the Federal Reserve's dual objectives of price stability and maximum employment. Participants noted that financial conditions had worsened significantly over the intermeeting period. The failure or near failure of a number of major financial institutions had deepened market concerns about counterparty credit risk and liquidity risk. As a result, financial intermediaries had cut back on lending to some counterparties, particularly for terms beyond overnight, and in general were conserving liquidity and capital. Moreover, risk aversion of investors increased, driving credit spreads sharply higher. Survey results and anecdotal information also suggested that credit conditions had tightened significantly further for businesses and households. Equity prices had varied widely and were substantially lower, on net. Participants saw the potential for financial strains to intensify if some investors, such as hedge funds, found it necessary to sell assets and as lending institutions built reserves against losses. Participants were concerned that the negative spiral in which financial strains lead to weaker spending, which in turn leads to higher loan losses and a further deterioration in financial conditions, could persist for a while longer. While the global efforts to recapitalize banks and guarantee deposits had helped stabilize the situation, risk spreads remained higher, asset prices lower, and credit conditions tighter than prior to the recent disruptions. Moreover, some participants noted that the specifics and effectiveness of some government programs to support financial markets and institutions remained unclear. Participants indicated that the increase in financial turmoil had already had an impact on business decisions. Reports from contacts in many parts of the country suggested that the weaker and less certain economic outlook was leading businesses to cancel capital and other discretionary expenditures and lay off workers. Several participants noted that even businesses that had previously been largely unaffected by the financial turbulence were now experiencing difficulties obtaining new credit, and some businesses were said to be drawing down lines of credit preemptively rather than risk the lines becoming unavailable. Contacts indicated that fewer commercial real estate construction projects were being undertaken. Residential construction activity remained extremely subdued, with the stock of unsold homes still very elevated. Meeting participants noted that real consumer spending had been weakening through the summer, responding to lower employment and tighter credit. Moreover, households, like businesses, were reportedly reacting to the shifting economic circumstances in recent weeks by cutting expenditures further. Spending on consumer durables, such as automobiles, and discretionary items had been particularly hard hit, and retailers anticipated very weak holiday spending. Participants noted that the financial turmoil had increasingly become an international phenomenon, leading to a marked deterioration in global growth prospects. While advanced foreign economies had already shown signs of slowing, they had been significantly affected by the worsening of financial strains over the intermeeting period. Moreover, a number of emerging market economies, which had heretofore been less influenced by the financial developments in industrial countries, had in recent weeks been significantly affected, as the increasing strains in financial markets led global investors to pull back from exposures to such economies. As a result, interest rates on emerging market debt had shot up and prices of emerging market equity had dropped sharply. Participants saw the stronger dollar and weaker growth abroad as likely to restrain future growth in U.S. exports. Participants agreed that inflation was likely to diminish materially in coming quarters. Commodity prices had fallen sharply, the dollar had strengthened notably, and considerable economic slack was anticipated. Moreover, some survey measures of inflation expectations had declined as had those derived from inflation-linked Treasury securities, although recent movements in the latter measures were likely influenced in part by increases in the premiums required to hold the relatively illiquid inflation-indexed securities. Some participants indicated that their business contacts had reported reduced pricing power and lower markups. Against this backdrop, participants generally expected inflation to decline to levels consistent with price stability. A few participants noted that disruptions to the credit intermediation process and the inefficiencies associated with shifts of resources among economic sectors could be expected to reduce aggregate supply as well as restrain aggregate demand; as a consequence, such factors could limit the effect of slower output growth on rates of resource slack and inflation. Others, though, saw a risk that if resource utilization remained weak for some time, inflation could fall below levels consistent with the Federal Reserve's dual mandate for promoting price stability and maximum employment, a development that would pose important policy challenges in light of the already-low level of the Committee's federal funds rate target. Participants discussed a number of issues relating to broader monetary policy strategy. Over the past year, the Federal Reserve's response to the financial turbulence had encompassed substantial monetary policy easing, the provision of large volumes of liquidity through standard and extraordinary means, and facilitating the resolution of troubled, systemically important financial institutions. Participants judged that the policy actions had been helpful and well calibrated to their assessment of the developing situation. Several participants observed that it would be crucial for such policy actions to be unwound appropriately as the financial situation normalized. However, participants also observed that unfolding economic developments could require the FOMC to further lower its target for the federal funds rate in the future and to review the adequacy of its liquidity facilities. In the discussion of monetary policy for the intermeeting period, Committee members agreed that significant easing in policy was warranted at this meeting in view of the marked deterioration in the economic outlook and anticipated reduction in inflation pressures. The recent substantial tightening in financial conditions, the sharp downshift in spending here and abroad, and the rapid abatement of upside inflation risks all suggested that a forceful policy response would be appropriate. Some members were concerned that the effectiveness of cuts in the target federal funds rate may have been diminished by the financial dislocations, suggesting that further policy action might have limited efficacy in promoting a recovery in economic growth. And some also noted that the Committee had limited room to lower its federal funds rate target further and should therefore consider moving slowly. However, others maintained that the possibility of reduced policy effectiveness and the limited scope for reducing the target further were reasons for a more aggressive policy adjustment; an easing of policy should contribute to a beneficial reduction in some borrowing costs, even if a given rate reduction currently would elicit a smaller effect than in more typical circumstances, and more aggressive easing should reduce the odds of a deflationary outcome. Members also saw the substantial downside risks to growth as supporting a relatively large policy move at this meeting, though even after today's 50 basis point action, the Committee judged that downside risks to growth would remain. Members anticipated that economic data over the upcoming intermeeting period would show significant weakness in economic activity, and some suggested that additional policy easing could well be appropriate at future meetings. In any event, the Committee agreed that it would take whatever steps were necessary to support the recovery of the economy. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee in the immediate future seeks conditions in reserve markets consistent with reducing the federal funds rate to an average of around 1 percent." The vote encompassed approval of the statement below to be released at 2:15 p.m.: "The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 1 percent. The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures. Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit. In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate in coming quarters to levels consistent with price stability. Recent policy actions, including today's rate reduction, coordinated interest rate cuts by central banks, extraordinary liquidity measures, and official steps to strengthen financial systems, should help over time to improve credit conditions and promote a return to moderate economic growth. Nevertheless, downside risks to growth remain. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability." Votes for this action: Messrs. Bernanke and Geithner, Ms. Duke, Messrs. Fisher, Kohn, and Kroszner, Ms. Pianalto, Messrs. Plosser, Stern, and Warsh. Votes against this action: None. It was agreed that the next meeting of the Committee would be held on Tuesday, December 16, 2008. The meeting adjourned at 11:45 a.m. Conference CallsOn September 29, 2008, the Committee met by conference call to review recent developments and to consider changes to swap arrangements with foreign central banks. Amid signs of growing strains in money markets, the discussion focused on recent Federal Reserve actions and on potential expansions in official liquidity facilities. In light of severe pressures in dollar funding markets abroad, the Committee unanimously approved both extending the liquidity-related swap arrangements with foreign central banks an additional three months, through April 30, 2009, and increasing substantially the sizes of those existing arrangements. The enlarged facilities would support the provision of U.S. dollar liquidity in amounts of up to $30 billion by the Bank of Canada, $80 billion by the Bank of England, $120 billion by the Bank of Japan, $15 billion by Danmarks Nationalbank, $240 billion by the European Central Bank, $15 billion by the Norges Bank, $30 billion by the Reserve Bank of Australia, $30 billion by Sveriges Riksbank, and $60 billion by the Swiss National Bank. In addition, the Committee was briefed on plans for implementation of a provision in pending legislation that would allow the Federal Reserve to begin immediately to pay interest on reserves held by depository institutions, and on the proposed acquisition of Wachovia by Citigroup. On October 7, 2008, the Committee again met by conference call. Stresses in financial markets had continued to increase: Interest-rate spreads in interbank funding markets had widened markedly, corporate and municipal bond yields had risen, and equity prices had dropped sharply. For the first time in many years, the net asset value of a major money market fund had fallen below $1 per share; this event sparked a flight out of prime money market funds and caused a severe impairment of the functioning of the commercial paper market. Since the September 16 FOMC meeting, indicators of economic activity in both the United States and in major foreign countries had come in weaker than expected. In the United States, automobile sales, capital goods shipments, and private payrolls had fallen notably. Elsewhere, indicators of economic activity and sentiment had deteriorated in a broad range of important foreign economies. Prices of crude oil and other commodities had dropped substantially, and some measures of inflation expectations had declined. Participants agreed that downside risks to economic growth had increased and upside risks to inflation had diminished. Participants discussed the considerable expansion of Federal Reserve liquidity in recent months. Most agreed that these actions to provide liquidity had had a beneficial impact. Nonetheless, financial conditions were exerting considerable restraint on economic activity. All members judged that a significant easing in policy at this time was appropriate to foster moderate economic growth and to reduce the downside risks to economic activity. Members also welcomed the opportunity to coordinate this policy action with similar measures by the Bank of Canada, the Bank of England, the European Central Bank, Sveriges Riksbank, and the Swiss National Bank. By showing that policymakers around the globe were working closely together, had a similar view of global economic conditions, and were willing to take strong actions to address those conditions, coordinated action could help to bolster consumer and business confidence and so yield greater economic benefits than unilateral action. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee in the immediate future seeks conditions in reserve markets consistent with reducing the federal funds rate to an average of around 1-1/2 percent." The vote encompassed approval of the statement below: "The Federal Open Market Committee has decided to lower its target for the federal funds rate 50 basis points to 1-1/2 percent. The Committee took this action in light of evidence pointing to a weakening of economic activity and a reduction in inflationary pressures. Incoming economic data suggest that the pace of economic activity has slowed markedly in recent months. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit. Inflation has been high, but the Committee believes that the decline in energy and other commodity prices and the weaker prospects for economic activity have reduced the upside risks to inflation. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability." Votes for this action: Messrs. Bernanke and Geithner, Ms. Duke, Messrs. Fisher, Kohn, and Kroszner, Ms. Pianalto, Messrs. Plosser, Stern, and Warsh. Votes against this action: None. Notation VotesBy notation vote completed September 21, 2008 the Committee unanimously approved the following resolution: "The FOMC amends paragraph 1.A. of the Authorization for Foreign Currency Operations to include Australian dollars in the list of foreign currencies in which the Federal Reserve Bank of New York may transact for the System Open Market Account." By notation vote completed on October 6, 2008, the Committee unanimously approved the minutes of the FOMC meeting held on September 16, 2008. By notation vote completed October 11, 2008 the Committee unanimously approved the following resolution: "The Federal Open Market Committee authorizes the Federal Reserve Bank of New York (FRBNY) to increase the amounts available from the System Open Market Account under the existing reciprocal currency arrangements ("swap" arrangements) with the Bank of England, the European Central Bank, the Bank of Japan, and the Swiss National Bank to meet the amounts requested by those central banks in connection with their fixed-rate tender auctions. The FRBNY must report to the Committee each time the aggregate draws by one of these central banks increases the level outstanding for that bank by an increment of $200 billion over the level outstanding on October 10, 2008." _____________________________ Brian F. MadiganSecretary 1. Attended Wednesday's session only. Return to text Return to top

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Minute

A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, October 28, 2008 at 2:00 p.m. and continued on Wednesday, October 29, 2008 at 9:00 a.m. PRESENT:Mr. Bernanke, ChairmanMr. Geithner, Vice ChairmanMs. DukeMr. FisherMr. KohnMr. KrosznerMs. PianaltoMr. PlosserMr. SternMr. Warsh Ms. Cumming, Messrs. Evans, Lacker, and Lockhart, and Ms. Yellen, Alternate Members of the Federal Open Market Committee Messrs. Bullard, Hoenig, and Rosengren, Presidents of the Federal Reserve Banks of St. Louis, Kansas City, and Boston, respectively Mr. Madigan, Secretary and EconomistMs. Danker, Deputy SecretaryMr. Skidmore, Assistant SecretaryMs. Smith, Assistant SecretaryMr. Alvarez, General CounselMr. Baxter, Deputy General CounselMr. Sheets, Economist Mr. Stockton, Economist Messrs. Connors, English, and Kamin, Ms. Mester, Messrs. Rosenblum, Slifman, Sniderman, and Wilcox, Associate Economists Mr. Dudley, Manager, System Open Market Account Ms. Bailey, Deputy Director, Division of Banking Supervision and Regulation, Board of Governors Mr. Clouse, Deputy Director, Division of Monetary Affairs, Board of Governors Mr. Struckmeyer,1 Deputy Staff Director, Office of Staff Director for Management, Board of Governors Mr. Blanchard, Assistant to the Board, Office of Board Members, Board of Governors Messrs. Reifschneider and Wascher, Associate Directors, Division of Research and Statistics, Board of Governors Messrs. Levin and Nelson, Associate Directors, Division of Monetary Affairs, Board of Governors Ms. Kole, Assistant Director, Division of International Finance, Board of Governors Mr. McCarthy, Visiting Reserve Bank Officer, Division of Monetary Affairs, Board of Governors Mr. Oliner, Senior Adviser, Division of Research and Statistics, Board of Governors Mr. Small, Project Manager, Division of Monetary Affairs, Board of Governors Messrs. Bassett and Luecke, Section Chiefs, Division of Monetary Affairs, Board of Governors Mr. Morin, Senior Economist, Division of Research and Statistics, Board of Governors Ms. Low, Open Market Secretariat Specialist, Division of Monetary Affairs, Board of Governors Mr. Moore, First Vice President, Federal Reserve Bank of Cleveland Mr. Fuhrer, Executive Vice President, Federal Reserve Bank of Boston Messrs. Altig and McAndrews, Ms. Mosser, Messrs. Rasche, Sullivan, and Williams, Senior Vice Presidents, Federal Reserve Banks of Atlanta, New York, New York, St. Louis, Chicago, and San Francisco, respectively Messrs. Clark and Hornstein, Vice Presidents, Federal Reserve Banks of Kansas City and Richmond, respectively Mr. Weber, Senior Research Officer, Federal Reserve Bank of Minneapolis The Manager of the System Open Market Account reported on recent developments in foreign exchange markets. There were no open market operations in foreign currencies for the System's account in the period since the previous meeting. The Manager also reported on developments in domestic financial markets and on System open market operations in government securities and federal agency obligations during the period since the previous meeting. By unanimous vote, the Committee ratified these transactions. In the discussion of System open market operations over the period, it was noted that reserve management had become more complex as a result of the large provision of reserves associated with the recent expansion of the Federal Reserve's liquidity facilities; in particular, the effective federal funds rate had been persistently below the FOMC's target. While the payment of interest on reserves seemed to be helpful in mitigating downward pressure on the funds rate, a number of institutions evidently were willing to sell funds at interest rates below that paid on excess reserve balances. Anecdotal reports suggested that this was particularly the case for those institutions that are not eligible to receive interest on the balances they maintain at the Federal Reserve. Going forward, however, the interest rate on excess reserve balances could be adjusted, and it might establish a more effective floor on the federal funds rate over time as more depository institutions revise their strategies in the federal funds market in light of the payment of interest on reserves. In view of a further widening in financial market strains internationally, the Committee considered proposals to establish temporary reciprocal currency ("swap") arrangements with several additional foreign central banks. Members unanimously approved the following resolution, which effectively permitted the Foreign Currency Subcommittee to establish a swap line with the Reserve Bank of New Zealand. "The FOMC amends paragraph 1.A. of the Authorization for Foreign Currency Operations to include the New Zealand dollar in the list of foreign currencies in which the Federal Reserve Bank of New York may transact for the System Open Market Account." Meeting participants also discussed a proposal to set up temporary liquidity-related swap arrangements with the central banks of Mexico, Brazil, Korea, and Singapore. In their remarks, participants focused on the outlook for complementarity between these swaps and the new short-term liquidity facility that the International Monetary Fund was considering; on the governance and structure of the swap lines; and on the particular countries included. Several participants pointed to the international reserves held by the countries and the importance of ensuring that these temporary swap lines, like the others that had been established during this period, be used only for the purposes intended. On balance, the Committee concluded that in current circumstances the swap arrangements with these four large and systemically important economies were appropriate, and it unanimously approved the following resolutions. "The FOMC directs the Federal Reserve Bank of New York to establish and maintain a reciprocal currency arrangement ("swap arrangement") for the System Open Market Account with each of (i) the Banco Central do Brasil, (ii) the Bank of Korea, (ii) the Banco de Mexico, and (iv) the Monetary Authority of Singapore. Each such swap arrangement would be for an aggregate amount not to exceed $30 billion. Drawings under the arrangement require approval. Unless extended by the Committee, each such swap arrangement shall expire on April 30, 2009. The FOMC amends paragraph 1.A. of the Authorization for Foreign Currency Operations to include the Brazilian real, the Korean won, and the Singapore dollar in the list of foreign currencies in which the Federal Reserve Bank of New York may transact for the System Open Market Account. The FOMC delegates to the Foreign Currency Subcommittee the authority to approve individual drawing requests of up to $5 billion under each of the aforementioned swap arrangements with the Banco Central do Brasil, the Bank of Korea, the Banco de Mexico, and the Monetary Authority of Singapore." A number of adverse financial developments influenced economic and financial market conditions over the intermeeting period. Lehman Brothers Holdings had filed for bankruptcy the day before the meeting of the Committee in September. In large part because of losses on Lehman debt, the net asset value of a major money market mutual fund fell below $1 per share, spurring a substantial outflow from money market mutual funds and straining their liquidity. The rapid deterioration of American International Group, Inc. (AIG), and Wachovia Corporation, along with the closing of Washington Mutual, led to intensified market concerns about the condition of financial institutions. In this environment, investors pulled back from risk-taking, funding markets for terms beyond overnight largely ceased to function at times, credit risk spreads rose sharply, and equity prices registered steep declines. The information reviewed at the October meeting indicated that economic conditions deteriorated in recent months. The labor market weakened further in September as private payrolls fell at a faster pace than earlier in the year and the unemployment rate remained above 6 percent. Industrial production fell in September, although much of the drop was related to effects of recent hurricanes and a strike at an aircraft manufacturer. Consumer spending declined, reflecting stagnant real income, tighter credit, declining wealth, and concerns about economic conditions. The housing market remained weak, with construction activity, new home sales, and home prices falling further. Business spending on equipment and software appeared to have declined again in the third quarter, and indicators of investment in structures weakened. Economic activity in many foreign economies slowed in recent months. Headline consumer inflation measures, pulled down by declines in consumer energy prices, moderated in August and September. Core consumer inflation measures also eased somewhat in these two months. The labor market continued to weaken. According to the September labor market report, the unemployment rate remained at 6.1 percent, but private payroll employment fell faster than the average pace earlier in the year. Most major industry groups shed jobs. The manufacturing, construction, and temporary help industries continued to experience sizable losses in employment; meanwhile, retail trade and financial services registered larger declines than earlier in the year. Nonbusiness services added jobs, but at the slowest rate of the year. The average workweek and aggregate hours declined in September, and weekly unemployment insurance claims continued to rise in October. Industrial production dropped sharply in September. Although much of the decline was due to the effects of the recent hurricanes and a strike at an aircraft manufacturer, most major industries experienced slow or declining output in recent months. Motor vehicle assemblies were unchanged in the third quarter at a low level. The pace of high-tech equipment production slowed in the third quarter relative to its rate in the first half of the year, reportedly in part because tight credit conditions were restraining demand. Available information suggested that demand and production in this sector were likely to remain relatively subdued over the coming months. The output of other manufacturing sectors declined in the third quarter. While standard indicators of near-term production suggested factory output would decline further over the next few months, the recovery of production in industries affected by the hurricanes was expected to offset these declines to a degree. The factory utilization rate fell in September to well below its long-run average. Real personal consumption expenditures (PCE) apparently declined in September for the fourth consecutive month. Motor vehicle sales fell back to their very low July pace, and preliminary reports indicated that the slump continued into October, as tighter credit conditions were restraining demand. Purchases of goods other than motor vehicles were estimated to have fallen noticeably. Real outlays on services other than energy increased only modestly in July and August. Real disposable income, excluding the effects of tax rebates and the emergency unemployment benefits, was little changed in July and August from the second-quarter average. Measures of consumer sentiment dropped in October to near or below their low levels of midyear, with the Conference Board measure exceptionally low. Residential construction activity continued to decline steeply through the third quarter. In September, both single-family housing starts and permit issuance fell. In the multifamily sector, starts edged up in September but remained toward the lower end of their two-year range. New home sales in August and September were at a pace well below that of the first half of the year. Although the cutbacks in homebuilding had reduced the inventory of unsold houses, the slower rate of sales kept the months' supply of new homes very elevated relative to the level that had prevailed before the downturn in the housing market. Sales of existing single-family homes in September were somewhat higher than they had been earlier in the year, likely supported by increases in foreclosure-related sales. Tight conditions in mortgage markets continued to restrain housing demand, especially for borrowers needing nonconforming mortgages. Several indexes indicated that house prices declined substantially over the 12 months through August. In the business sector, investment in equipment and software appeared to weaken further in the third quarter. Nominal shipments of nondefense capital goods excluding aircraft were flat in the third quarter, while orders for those goods declined. Demand for high-tech equipment appeared to have softened considerably, and spending on non-high-tech, non-transportation equipment was estimated to have fallen. Transportation equipment investment was held down in the third quarter by falling sales for medium and heavy trucks and by a strike-induced drop in aircraft deliveries in September. Nominal expenditures on nonresidential structures declined for the second consecutive month in August. Forward-looking indicators turned more downbeat: Vacancy rates for commercial properties rose further, property values declined, and the architectural billings index fell in September. Furthermore, the latest Senior Loan Officer Opinion Survey on Bank Lending Practices indicated that banks tightened lending standards for commercial real estate loans over the past three months. The book-value data for manufacturing and trade inventories suggested that the real value of inventories continued to decline over the summer through August, but a number of indicators suggested that stocks in some industries remained above desired levels. The days' supply of light motor vehicles at dealers had risen, on balance, through the year and was rather high in September. The ratio of book-value inventories to sales in the manufacturing and trade sectors, excluding motor vehicles, rose in August, particularly in a number of durable goods sectors. In addition, the index of customers' inventories in the Institute of Supply Management's manufacturing survey indicated that inventories remained above desired levels. The U.S. international trade deficit narrowed in August, with a decline in the value of imports more than offsetting a fall in the value of exports of goods and services. A drop in the value of petroleum imports, which reflected both lower volumes and a decrease in prices, exceeded an increase in non-oil imports that was driven by a rise in imports of consumer goods and industrial supplies. Exports of automotive products fell sharply in August after a surge in July, and exports of consumer goods, industrial supplies, and services moved down after strong increases in previous months. Aircraft exports surged, but sales of other capital goods declined. The data for the advanced foreign economies during the intermeeting period generally suggested that economic activity was weakening further, and confidence indicators in these areas declined as the financial crisis worsened. Labor market conditions deteriorated in these economies, with the exception of Canada. Real gross domestic product (GDP) fell in the United Kingdom in the third quarter. Headline inflation continued to be elevated in many economies, but the most recent consumer price indexes for Japan and for the euro area suggested some deceleration in prices. In emerging market economies, data received over the intermeeting period showed a continued slowing of real activity. Real GDP growth in China moved down in the third quarter. Industrial production contracted in recent months for many countries. External balances deteriorated significantly in many emerging market economies as exports to advanced economies slowed. Headline inflation in emerging market economies eased, reflecting falling oil and food prices. Headline consumer prices in the United States were estimated to have risen only modestly in September, extending the recent moderation of overall inflation following the rapid increases earlier in the year. Consumer energy prices fell for the second consecutive month, while retail food prices continued to climb at a rapid pace, boosted by the substantial run-up in farm commodity prices through midyear. Core consumer price inflation rose somewhat during the third quarter, reflecting the pass-through of previous increases in the costs of energy and materials and import prices. Those upward price pressures diminished recently: Prices of oil and other commodities fell sharply over the intermeeting period, and non-oil import prices as well as producer prices of intermediate materials excluding food and energy declined in September. Some survey measures of inflation expectations declined during the period. Available measures of hourly labor compensation increased at about the same moderate pace as over the past several years. At its September meeting, the Federal Open Market Committee (FOMC) kept the target federal funds rate unchanged at 2 percent. The Committee's statement noted that strains in financial markets had increased significantly and that labor markets had weakened further. Economic growth appeared to have slowed recently, which partly reflected a softening of household spending. Tight credit conditions, the ongoing housing contraction, and some slowing in export growth were likely to weigh on economic growth over the next few quarters. The Committee stated that, over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help promote moderate economic growth. Inflation had been high, spurred by the earlier increases in the prices of energy and some other commodities. The Committee expected inflation to moderate later this year and next year, but the inflation outlook remained highly uncertain. The downside risks to growth and the upside risks to inflation were both of significant concern to the Committee. The Committee indicated that it would continue to monitor economic and financial developments carefully and would act as needed to promote sustainable economic growth and price stability. Over the intermeeting period, market participants marked down their expectations for the path of the federal funds rate for the next two years. The Committee's decision to leave the target federal funds rate unchanged at the September FOMC meeting led some investors to scale back expectations for policy easing over the next year. Subsequently, however, market expectations reversed in response to the heightened financial turmoil and to generally weaker-than-expected economic data. The Committee's decision to reduce the target federal funds rate 50 basis points as part of a coordinated action with other central banks on October 8, along with the accompanying statement, led investors to mark down further the expected path for the federal funds rate. Yields on short-term nominal Treasury coupon securities declined over the intermeeting period, reportedly as a result of substantial flight-to-quality flows and heightened demand for liquidity. In contrast, higher term premiums and expectations of increases in the supply of Treasury securities associated with the Emergency Economic Stabilization Act and other initiatives seemed to put upward pressure on longer-term nominal Treasury yields. Yields on longer-term inflation-indexed Treasury securities, which are relatively illiquid, rose more sharply than did those on nominal securities. Measures of inflation compensation based on differences between nominal and inflation-indexed Treasury yields were quite volatile over the intermeeting period and, because of shifting liquidity premiums, likely provided less information than usual concerning inflation expectations or inflation uncertainty. In the wake of the failures or near failures of several large financial institutions, short-term funding markets came under significant additional pressure over the intermeeting period, and the Federal Reserve and other central banks took a number of actions to provide liquidity and improve market functioning. In the overnight federal funds market, financial institutions became more selective about the counterparties with whom they were willing to trade. The overnight London interbank offered rate (Libor) rose substantially, and the spread of term Libor rates over comparable-maturity overnight index swap (OIS) rates rose sharply from already-high levels. The demand for commercial paper declined as prime money market mutual funds experienced large net outflows after the net asset value of one such fund fell below $1 per share. As a consequence, risk spreads on commercial paper rose considerably and were very volatile. Amid strong flows into government-only money market mutual funds, the demand for short-dated Treasury bills rose, and these securities traded with very low yields despite sizable new issuance during the period. The market for repurchase agreements (repos) also experienced significant dislocations during the intermeeting period. Partly because of high demand for Treasury securities, the overnight repo rate for Treasury general collateral was near zero for much of the period, and failures to deliver Treasury securities reached record highs. Repo rates on agency collateral also were volatile, and liquidity in non-Treasury, non-agency repo markets was poor. Conditions in short-term funding markets improved somewhat following the announcements of a U.S. government guarantee of certain liabilities of U.S. banking organizations and similar actions by foreign authorities, the expansion of swap arrangements between the Federal Reserve and other central banks, and a number of initiatives by the Federal Reserve and the Treasury to address the pressures on money market mutual funds and the commercial paper market. In longer-term credit markets, yields and spreads on investment-grade and speculative-grade corporate bonds increased, while indexes of credit default swap (CDS) spreads for investment-grade financial and nonfinancial firms reached unprecedented levels. Liquidity in the corporate bond and CDS markets was strained. Issuance of investment-grade corporate bonds was moderate in September and October, while there was little issuance of speculative-grade bonds. Commercial and industrial loans continued to expand rapidly in early October, as firms drew on existing bank lines of credit. However, conditions deteriorated in the secondary market for syndicated leveraged loans, with prices falling to new lows and bid-asked spreads widening notably. Broad equity price indexes declined sharply over the intermeeting period, and option-implied volatility on the S&P 500 index rose well above its previous record high. The Senior Loan Officer Opinion Survey pointed to further tightening of terms and standards for consumer loans. Consumer credit increased at its slowest pace in more than 15 years during the three months ending in August. Conditions in the municipal bond market were also poor over much of the intermeeting period. The strains from the banking and credit crisis intensified and took on a more global aspect over the intermeeting period. This development and the related erosion of the economic outlook and reduction in inflationary pressures led many central banks to reduce their policy rates, including in the internationally coordinated action announced on October 8. Liquidity conditions in the money markets of major foreign economies deteriorated further. Spreads between term Libor and OIS rates in euros and sterling rose from already-elevated levels, although by less than in dollars. Sovereign bond yields in the advanced foreign economies were volatile; nominal yield curves in many countries steepened on net. Equity market indexes fell sharply in the advanced economies as well as in emerging market economies, which until recently had not been hit as hard by the financial turmoil. The dollar appreciated against most currencies, with the prominent exception of the Japanese yen. In the United States, M2 accelerated sharply in September, and it appeared to be on pace for another large increase in October, apparently reflecting a heightened preference by households and firms for safe assets. Liquid deposits expanded strongly in September, but leveled off in early October. Small time deposits increased briskly in September and early October as banks and thrifts reportedly continued to bid aggressively for these deposits. Retail money funds, which were little changed in September, experienced significant net inflows in early October. In contrast, institutional money funds, which are not included in M2, experienced substantial outflows during this period. In response to the extraordinary stresses in financial markets, the Federal Reserve together with other U.S. government agencies and many foreign central banks and governments implemented a number of unprecedented policy initiatives during the intermeeting period. Early in the period, the condition of AIG, a large complex financial institution, deteriorated rapidly. In view of the likely systemic implications and the potential for significant adverse effects on the economy of a disorderly failure of AIG, the Federal Reserve Board on September 16, with the support of the Treasury, authorized the Federal Reserve Bank of New York to lend up to $85 billion to the firm to assist it in meeting its obligations and to facilitate the orderly sale of some of its businesses. On October 8, the Federal Reserve announced a supplemental liquidity arrangement for AIG. The Federal Reserve Board also approved a number of new facilities to address strains in short-term funding markets. On September 19, it announced the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), which extends nonrecourse loans at the primary credit rate to U.S. depository institutions and bank holding companies to finance the purchase of high-quality asset-backed commercial paper (ABCP) from money market mutual funds. On October 7, the Board announced the creation of the Commercial Paper Funding Facility (CPFF), which provides a liquidity backstop to U.S. issuers of highly rated commercial paper through a special-purpose vehicle that purchases three-month unsecured commercial paper and ABCP directly from eligible issuers. On October 21, it publicized the creation of the Money Market Investor Funding Facility (MMIFF), under which the Federal Reserve Bank of New York will provide funding to a series of special-purpose vehicles to facilitate an industry-supported initiative to finance the purchase of certain highly rated certificates of deposit, bank notes, and commercial paper from U.S. money market mutual funds. The AMLF, CPFF, and MMIFF were intended to improve the liquidity in short-term debt markets and ease the strains in credit markets more broadly. In addition, to address the sizable demand for dollar funding in foreign jurisdictions, the FOMC authorized the expansion of its existing swap lines with the European Central Bank and Swiss National Bank; by the end of the intermeeting period, the formal quantity limits on these lines had been eliminated. The quantity limits were also lifted on new swap lines set up with the Bank of Japan and the Bank of England. The FOMC authorized new swap lines with five other central banks during the period. In domestic markets, the Federal Reserve raised the regular auction amounts of the 28- and 84-day maturity Term Auction Facility (TAF) auctions to $150 billion each. Also, the Federal Reserve announced two forward TAF auctions for $150 billion each, to be conducted in November to provide funding over year-end. In total, up to $900 billion of TAF credit over year-end was authorized. Despite the substantial provision of liquidity by the Federal Reserve and other central banks, functioning in many credit markets remained very poor, a situation that reflected market participants' uncertainty about their liquidity needs and their future access to funding as well as concerns about the health of many financial institutions. To strengthen confidence in U.S. financial institutions, the Treasury, the Federal Reserve, and the Federal Deposit Insurance Corporation (FDIC) issued a joint statement on October 14, which included several elements. First, the Treasury announced a voluntary capital purchase plan under which eligible financial institutions could sell preferred shares to the U.S. government. Second, the FDIC provided a temporary guarantee of the senior unsecured debt of all FDIC-insured institutions and their holding companies, as well as all balances in non-interest-bearing transaction deposit accounts. The statement included notice that nine major financial institutions had agreed to participate in both the capital purchase program and the FDIC guarantee program. Third, the Federal Reserve announced details of the CPFF, which was scheduled to begin on October 27. After this joint statement and the announcements of similar programs in a number of other countries, financial market pressures appeared to ease somewhat, though conditions remained strained. The expansion of existing liquidity facilities as well as the creation of new facilities contributed to a notable increase in the size of the Federal Reserve's balance sheet. The amount of primary credit outstanding rose considerably over the intermeeting period, with both foreign and domestic depository institutions making use of the discount window. TAF credit outstanding more than doubled over the period. Credit extended through the Primary Dealer Credit Facility rose rapidly ahead of quarter-end; although it subsided subsequently, the amount of credit outstanding remained well above the levels seen before mid-September. The Term Securities Lending Facility (TSLF) auctions conducted over the intermeeting period had very high demand; in addition, dealers exercised most of the options for TSLF loans spanning the September quarter-end. Two initiatives were introduced over the intermeeting period to help manage the expansion of the balance sheet and promote control of the federal funds rate. First, on September 17, the Treasury announced a temporary Supplementary Financing Program at the request of the Federal Reserve. Under this program, the Treasury issued short-term bills over and above its regular borrowing program, with the proceeds deposited at the Federal Reserve. This facility helped offset the provision of reserves to the banking system through the various liquidity facilities. Second, employing authority granted under the Emergency Economic Stabilization Act, the Federal Reserve Board announced on October 6 that it would pay interest on required and excess reserve balances beginning on October 9. The payment of interest on excess reserve balances was intended to assist in maintaining the federal funds rate close to the target set by the Committee. Initially, the interest rate on required reserves was set at the average target federal funds rate over each reserve maintenance period less 10 basis points, while the rate on excess reserves was set at the lowest target federal funds rate over each reserve maintenance period less 75 basis points. On October 22, the rate on excess reserves was adjusted to be the lowest target federal funds rate during the maintenance period less 35 basis points. In the forecast prepared for the meeting, the staff lowered its projection for economic activity in the second half of 2008 as well as in 2009 and 2010. Real GDP appeared to have declined in the third quarter, and the few available indicators that reflected conditions following the intensification of the financial market turmoil in mid-September pointed to another decline in the fourth quarter. The declines in stock-market wealth, low levels of consumer sentiment, weakened household balance sheets, and restrictive credit conditions were likely to hinder household spending over the near term. Business expenditures also probably would be held back by a weaker sales outlook and tighter credit conditions. The staff expected that real GDP would continue to contract somewhat in the first half of 2009 and then rise in the second half, with the result that real GDP would be about unchanged for the year. Although futures markets pointed to a lower trajectory for oil prices than at the time of the September meeting, real activity was expected to be restrained by further contraction in residential investment, reduced household wealth, continued tight credit conditions, and a deterioration of foreign economic performance. In 2010, real GDP growth was expected to pick up to near the rate of potential growth, as the restraints on household and business spending from the financial market tensions were anticipated to begin to ease and the contraction in the housing market to come to an end. With growth below its potential rate for an extended period, the unemployment rate was expected to rise significantly through early 2010. The staff reduced its forecast for both core and overall PCE inflation, as the disinflationary effects of the receding cost pressures of energy, materials, and import prices and of resource slack were expected to be greater than at the time of the September FOMC meeting. Core inflation was projected to slow considerably in 2009 and then to edge down further in 2010. In conjunction with this FOMC meeting, all participants--that is, Federal Reserve Board members and Reserve Bank presidents--provided annual projections for economic growth, the unemployment rate, and inflation for the period 2008 through 2011. The projections are described in the Summary of Economic Projections, which is attached as an addendum to these minutes. In their discussion of the economic situation and outlook, FOMC meeting participants indicated that the worsening financial situation, the slowdown in growth abroad, and incoming information on economic activity had led them to mark down significantly their outlook for growth. While economic activity had evidently already been slowing over the summer, the turmoil in recent weeks had apparently resulted in tighter financial conditions and greater uncertainty among businesses and households about economic prospects, further limiting their ability and willingness to make significant spending commitments. Recent measures of business and consumer sentiment had fallen to historical lows. Participants generally expected the economy to contract moderately in the second half of 2008 and the first half of 2009, and agreed that the downside risks to growth had increased. While some expected an improving financial situation to contribute to a recovery in growth by mid-2009, others judged that the period of economic weakness could persist for some time. Several participants indicated that they expected some fiscal stimulus in coming quarters, but they were uncertain about the extent and duration of the resulting support to economic activity. Participants agreed that in coming quarters inflation was likely to move down to levels consistent with price stability, reflecting the recent declines in the prices of energy and other commodities, the appreciation of the dollar, and the expected widening of margins of resource slack. Indeed, some saw a risk that over time inflation could fall below levels consistent with the Federal Reserve's dual objectives of price stability and maximum employment. Participants noted that financial conditions had worsened significantly over the intermeeting period. The failure or near failure of a number of major financial institutions had deepened market concerns about counterparty credit risk and liquidity risk. As a result, financial intermediaries had cut back on lending to some counterparties, particularly for terms beyond overnight, and in general were conserving liquidity and capital. Moreover, risk aversion of investors increased, driving credit spreads sharply higher. Survey results and anecdotal information also suggested that credit conditions had tightened significantly further for businesses and households. Equity prices had varied widely and were substantially lower, on net. Participants saw the potential for financial strains to intensify if some investors, such as hedge funds, found it necessary to sell assets and as lending institutions built reserves against losses. Participants were concerned that the negative spiral in which financial strains lead to weaker spending, which in turn leads to higher loan losses and a further deterioration in financial conditions, could persist for a while longer. While the global efforts to recapitalize banks and guarantee deposits had helped stabilize the situation, risk spreads remained higher, asset prices lower, and credit conditions tighter than prior to the recent disruptions. Moreover, some participants noted that the specifics and effectiveness of some government programs to support financial markets and institutions remained unclear. Participants indicated that the increase in financial turmoil had already had an impact on business decisions. Reports from contacts in many parts of the country suggested that the weaker and less certain economic outlook was leading businesses to cancel capital and other discretionary expenditures and lay off workers. Several participants noted that even businesses that had previously been largely unaffected by the financial turbulence were now experiencing difficulties obtaining new credit, and some businesses were said to be drawing down lines of credit preemptively rather than risk the lines becoming unavailable. Contacts indicated that fewer commercial real estate construction projects were being undertaken. Residential construction activity remained extremely subdued, with the stock of unsold homes still very elevated. Meeting participants noted that real consumer spending had been weakening through the summer, responding to lower employment and tighter credit. Moreover, households, like businesses, were reportedly reacting to the shifting economic circumstances in recent weeks by cutting expenditures further. Spending on consumer durables, such as automobiles, and discretionary items had been particularly hard hit, and retailers anticipated very weak holiday spending. Participants noted that the financial turmoil had increasingly become an international phenomenon, leading to a marked deterioration in global growth prospects. While advanced foreign economies had already shown signs of slowing, they had been significantly affected by the worsening of financial strains over the intermeeting period. Moreover, a number of emerging market economies, which had heretofore been less influenced by the financial developments in industrial countries, had in recent weeks been significantly affected, as the increasing strains in financial markets led global investors to pull back from exposures to such economies. As a result, interest rates on emerging market debt had shot up and prices of emerging market equity had dropped sharply. Participants saw the stronger dollar and weaker growth abroad as likely to restrain future growth in U.S. exports. Participants agreed that inflation was likely to diminish materially in coming quarters. Commodity prices had fallen sharply, the dollar had strengthened notably, and considerable economic slack was anticipated. Moreover, some survey measures of inflation expectations had declined as had those derived from inflation-linked Treasury securities, although recent movements in the latter measures were likely influenced in part by increases in the premiums required to hold the relatively illiquid inflation-indexed securities. Some participants indicated that their business contacts had reported reduced pricing power and lower markups. Against this backdrop, participants generally expected inflation to decline to levels consistent with price stability. A few participants noted that disruptions to the credit intermediation process and the inefficiencies associated with shifts of resources among economic sectors could be expected to reduce aggregate supply as well as restrain aggregate demand; as a consequence, such factors could limit the effect of slower output growth on rates of resource slack and inflation. Others, though, saw a risk that if resource utilization remained weak for some time, inflation could fall below levels consistent with the Federal Reserve's dual mandate for promoting price stability and maximum employment, a development that would pose important policy challenges in light of the already-low level of the Committee's federal funds rate target. Participants discussed a number of issues relating to broader monetary policy strategy. Over the past year, the Federal Reserve's response to the financial turbulence had encompassed substantial monetary policy easing, the provision of large volumes of liquidity through standard and extraordinary means, and facilitating the resolution of troubled, systemically important financial institutions. Participants judged that the policy actions had been helpful and well calibrated to their assessment of the developing situation. Several participants observed that it would be crucial for such policy actions to be unwound appropriately as the financial situation normalized. However, participants also observed that unfolding economic developments could require the FOMC to further lower its target for the federal funds rate in the future and to review the adequacy of its liquidity facilities. In the discussion of monetary policy for the intermeeting period, Committee members agreed that significant easing in policy was warranted at this meeting in view of the marked deterioration in the economic outlook and anticipated reduction in inflation pressures. The recent substantial tightening in financial conditions, the sharp downshift in spending here and abroad, and the rapid abatement of upside inflation risks all suggested that a forceful policy response would be appropriate. Some members were concerned that the effectiveness of cuts in the target federal funds rate may have been diminished by the financial dislocations, suggesting that further policy action might have limited efficacy in promoting a recovery in economic growth. And some also noted that the Committee had limited room to lower its federal funds rate target further and should therefore consider moving slowly. However, others maintained that the possibility of reduced policy effectiveness and the limited scope for reducing the target further were reasons for a more aggressive policy adjustment; an easing of policy should contribute to a beneficial reduction in some borrowing costs, even if a given rate reduction currently would elicit a smaller effect than in more typical circumstances, and more aggressive easing should reduce the odds of a deflationary outcome. Members also saw the substantial downside risks to growth as supporting a relatively large policy move at this meeting, though even after today's 50 basis point action, the Committee judged that downside risks to growth would remain. Members anticipated that economic data over the upcoming intermeeting period would show significant weakness in economic activity, and some suggested that additional policy easing could well be appropriate at future meetings. In any event, the Committee agreed that it would take whatever steps were necessary to support the recovery of the economy. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee in the immediate future seeks conditions in reserve markets consistent with reducing the federal funds rate to an average of around 1 percent." The vote encompassed approval of the statement below to be released at 2:15 p.m.: "The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 1 percent. The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures. Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit. In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate in coming quarters to levels consistent with price stability. Recent policy actions, including today's rate reduction, coordinated interest rate cuts by central banks, extraordinary liquidity measures, and official steps to strengthen financial systems, should help over time to improve credit conditions and promote a return to moderate economic growth. Nevertheless, downside risks to growth remain. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability." Votes for this action: Messrs. Bernanke and Geithner, Ms. Duke, Messrs. Fisher, Kohn, and Kroszner, Ms. Pianalto, Messrs. Plosser, Stern, and Warsh. Votes against this action: None. It was agreed that the next meeting of the Committee would be held on Tuesday, December 16, 2008. The meeting adjourned at 11:45 a.m. Conference CallsOn September 29, 2008, the Committee met by conference call to review recent developments and to consider changes to swap arrangements with foreign central banks. Amid signs of growing strains in money markets, the discussion focused on recent Federal Reserve actions and on potential expansions in official liquidity facilities. In light of severe pressures in dollar funding markets abroad, the Committee unanimously approved both extending the liquidity-related swap arrangements with foreign central banks an additional three months, through April 30, 2009, and increasing substantially the sizes of those existing arrangements. The enlarged facilities would support the provision of U.S. dollar liquidity in amounts of up to $30 billion by the Bank of Canada, $80 billion by the Bank of England, $120 billion by the Bank of Japan, $15 billion by Danmarks Nationalbank, $240 billion by the European Central Bank, $15 billion by the Norges Bank, $30 billion by the Reserve Bank of Australia, $30 billion by Sveriges Riksbank, and $60 billion by the Swiss National Bank. In addition, the Committee was briefed on plans for implementation of a provision in pending legislation that would allow the Federal Reserve to begin immediately to pay interest on reserves held by depository institutions, and on the proposed acquisition of Wachovia by Citigroup. On October 7, 2008, the Committee again met by conference call. Stresses in financial markets had continued to increase: Interest-rate spreads in interbank funding markets had widened markedly, corporate and municipal bond yields had risen, and equity prices had dropped sharply. For the first time in many years, the net asset value of a major money market fund had fallen below $1 per share; this event sparked a flight out of prime money market funds and caused a severe impairment of the functioning of the commercial paper market. Since the September 16 FOMC meeting, indicators of economic activity in both the United States and in major foreign countries had come in weaker than expected. In the United States, automobile sales, capital goods shipments, and private payrolls had fallen notably. Elsewhere, indicators of economic activity and sentiment had deteriorated in a broad range of important foreign economies. Prices of crude oil and other commodities had dropped substantially, and some measures of inflation expectations had declined. Participants agreed that downside risks to economic growth had increased and upside risks to inflation had diminished. Participants discussed the considerable expansion of Federal Reserve liquidity in recent months. Most agreed that these actions to provide liquidity had had a beneficial impact. Nonetheless, financial conditions were exerting considerable restraint on economic activity. All members judged that a significant easing in policy at this time was appropriate to foster moderate economic growth and to reduce the downside risks to economic activity. Members also welcomed the opportunity to coordinate this policy action with similar measures by the Bank of Canada, the Bank of England, the European Central Bank, Sveriges Riksbank, and the Swiss National Bank. By showing that policymakers around the globe were working closely together, had a similar view of global economic conditions, and were willing to take strong actions to address those conditions, coordinated action could help to bolster consumer and business confidence and so yield greater economic benefits than unilateral action. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee in the immediate future seeks conditions in reserve markets consistent with reducing the federal funds rate to an average of around 1-1/2 percent." The vote encompassed approval of the statement below: "The Federal Open Market Committee has decided to lower its target for the federal funds rate 50 basis points to 1-1/2 percent. The Committee took this action in light of evidence pointing to a weakening of economic activity and a reduction in inflationary pressures. Incoming economic data suggest that the pace of economic activity has slowed markedly in recent months. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit. Inflation has been high, but the Committee believes that the decline in energy and other commodity prices and the weaker prospects for economic activity have reduced the upside risks to inflation. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability." Votes for this action: Messrs. Bernanke and Geithner, Ms. Duke, Messrs. Fisher, Kohn, and Kroszner, Ms. Pianalto, Messrs. Plosser, Stern, and Warsh. Votes against this action: None. Notation VotesBy notation vote completed September 21, 2008 the Committee unanimously approved the following resolution: "The FOMC amends paragraph 1.A. of the Authorization for Foreign Currency Operations to include Australian dollars in the list of foreign currencies in which the Federal Reserve Bank of New York may transact for the System Open Market Account." By notation vote completed on October 6, 2008, the Committee unanimously approved the minutes of the FOMC meeting held on September 16, 2008. By notation vote completed October 11, 2008 the Committee unanimously approved the following resolution: "The Federal Open Market Committee authorizes the Federal Reserve Bank of New York (FRBNY) to increase the amounts available from the System Open Market Account under the existing reciprocal currency arrangements ("swap" arrangements) with the Bank of England, the European Central Bank, the Bank of Japan, and the Swiss National Bank to meet the amounts requested by those central banks in connection with their fixed-rate tender auctions. The FRBNY must report to the Committee each time the aggregate draws by one of these central banks increases the level outstanding for that bank by an increment of $200 billion over the level outstanding on October 10, 2008." _____________________________ Brian F. MadiganSecretary 1. Attended Wednesday's session only. Return to text Return to top

2008-10-07

Minute

A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, September 16, 2008 at 8:30 a.m. PRESENT:Mr. Bernanke, ChairmanMs. DukeMr. FisherMr. KohnMr. KrosznerMs. PianaltoMr. PlosserMr. SternMr. Warsh Ms. Cumming, Messrs. Evans, Lacker, and Lockhart, and Ms. Yellen, Alternate Members of the Federal Open Market Committee Messrs. Bullard, Hoenig, and Rosengren, Presidents of the Federal Reserve Banks of St. Louis, Kansas City, and Boston, respectivelyMr. Madigan, Secretary and EconomistMs. Danker, Deputy SecretaryMr. Skidmore, Assistant SecretaryMs. Smith, Assistant SecretaryMr. Alvarez, General CounselMr. Sheets, EconomistMr. Stockton, Economist Messrs. Connors, English, Kamin, Rolnick, Rosenblum, Slifman, Tracy, and Wilcox, Associate Economists Mr. Dudley, Manager, System Open Market Account Mr. Cole, Director, Division of Banking Supervision and Regulation, Board of Governors Mr. Blanchard, Assistant to the Board, Office of Board Members, Board of Governors Mr. Clouse, Deputy Director, Division of Monetary Affairs, Board of Governors Mr. Parkinson, Deputy Director, Division of Research and Statistics, Board of Governors Mr. Struckmeyer, Deputy Staff Director, Office of Staff Director for Management, Board of Governors Mr. Gagnon, Visiting Associate Director, Division of Monetary Affairs, Board of Governors Messrs. Reifschneider and Wascher, Associate Directors, Division of Research and Statistics, Board of Governors Mr. Oliner, Senior Adviser, Division of Research and Statistics, Board of Governors Mr. Small, Project Manager, Division of Monetary Affairs, Board of Governors Mr. Luecke, Section Chief, Division of Monetary Affairs, Board of Governors Mr. Carlson, Economist, Division of Monetary Affairs, Board of Governors Ms. Low, Open Market Secretariat Specialist, Division of Monetary Affairs, Board of Governors Mr. Moore, First Vice President, Federal Reserve Bank of San Francisco Mr. Judd, Executive Vice President, Federal Reserve Bank of San Francisco Mr. Altig, Ms. Baum, Messrs. Rasche, Schweitzer, Sellon, and Tootell, Senior Vice Presidents, Federal Reserve Banks of Atlanta, New York, St. Louis, Cleveland, Kansas City, and Boston, respectively Mr. Krane, Vice President, Federal Reserve Bank of Chicago Mr. Chatterjee, Senior Economic Adviser, Federal Reserve Bank of Philadelphia Mr. Wolman, Senior Economist, Federal Reserve Bank of Richmond The Manager of the System Open Market Account reported on recent developments in foreign exchange markets. There were no open market operations in foreign currencies for the System's account in the period since the previous meeting. The Manager also reported on developments in domestic financial markets and on System open market operations in government securities and federal agency obligations during the period since the previous meeting. By unanimous vote, the Committee ratified these transactions. In light of severe stresses in dollar funding markets, the Committee considered a proposal intended to provide the flexibility necessary to respond promptly to requests from foreign central banks to engage in temporary reciprocal currency ("swap") arrangements to be used in supporting dollar liquidity in their jurisdictions. After the discussion, the Committee voted unanimously to authorize its Foreign Currency Subcommittee to direct the Federal Reserve Bank of New York as needed to expand existing swap arrangements and to enter into new arrangements with foreign central banks to address strains in money markets. This authority extends through January 30, 2009. The information reviewed at the September meeting indicated that economic activity decelerated considerably in recent months. The labor market deteriorated further in August as private payrolls declined and the unemployment rate moved markedly higher. Industrial output was little changed in July, but fell sharply in August. Consumer spending weakened noticeably in recent months. Meanwhile, residential investment continued to decline steeply through midyear. In contrast, business investment in equipment and structures generally held up through July. On the inflation front, overall consumer prices rose rapidly for a third straight month in July but then edged down in August, because of a sharp drop in energy prices. Core consumer price inflation remained elevated in July and eased somewhat in August. The labor market continued to weaken. According to the August employment report, private payroll employment fell by a bit more than the average seen earlier this year. Most major industry groups shed jobs; manufacturing posted a particularly noticeable loss. Job losses in the construction industry diminished over July and August despite the ongoing contraction in residential investment. Hiring in nonbusiness services, which include the education and health industries, and in natural resources and mining increased in line with recent trends. The average workweek held steady and aggregate hours edged lower. The unemployment rate jumped 0.4 percentage point, to 6.1 percent, in August, while the labor force participation rate held steady. Industrial production fell sharply in August after edging up in July. Motor vehicle assemblies dropped in August as automakers scaled back production following a sharp decline in vehicle sales in July. The output of high-tech equipment rose at a moderate rate in the first half of the year, but indicators of production gains in the high-tech sector pointed toward relatively subdued growth in the third quarter. The output of other manufacturing sectors declined for a third consecutive month in August, and indicators of near-term production suggested that the industrial sector was likely to remain soft over the next few months. For most major industry groups, factory utilization rates in August remained below their long-run averages. Real personal consumption expenditures (PCE) turned down in June and declined more noticeably in July; over the two months, outlays for motor vehicles dropped markedly and spending on other goods weakened substantially. The recent weakness in consumer spending on goods excluding motor vehicles contrasted sharply with solid growth in the spring. Outlays for services were reported to have increased modestly in June and July. Total nominal retail sales decreased in August. Real disposable income was boosted significantly by the tax rebates in the second quarter; excluding the temporary rebates, real disposable income fell in that quarter and continued to move lower in July. Early September readings on consumer sentiment rose from the low levels recorded over the past several months. Residential construction activity continued to decline steeply through midyear. In July, both single-family housing starts and permit issuance fell further. In the multifamily sector, starts dropped back in July to a rate more in line with its historical range. June's spike in multifamily starts was related to more-stringent building codes that took effect in New York City on July 1, which apparently led developers to pull forward the start date of some planned apartment projects. Recent cutbacks in new residential construction reduced the level of new home inventories, and the relative stability in sales of new homes allowed those inventory reductions to begin to bring down the months' supply of new homes for sale. Even so, the months' supply of new homes for sale remained extremely elevated relative to the level that prevailed before the downturn in the housing market. Sales of existing single-family homes were relatively flat since the end of last year. Tight conditions in mortgage markets over the summer continued to restrain housing demand, especially for borrowers seeking nonconforming mortgages. Several indexes indicated that house prices had declined substantially over the past 12 months, and these prices appeared to remain on a downward trajectory. In the business sector, investment in equipment and software fell in the second quarter, largely reflecting a sharp drop in spending on motor vehicles. In contrast, growth of real outlays for nontransportation equipment posted a moderate gain. The data on nominal orders and shipments of nondefense capital goods excluding aircraft rose substantially in July, although some of the gain in nominal shipments may have reflected unusually large price increases. Moreover, as in previous months, orders and shipments were likely supported in July by increased foreign demand. Real nonresidential investment increased at a robust rate in the second quarter; however, nominal expenditures declined in July, and forward-looking indicators remained downbeat. Vacancy rates for commercial properties moved higher in the first half of the year and the architectural billings index continued to register weak readings. Real nonfarm inventories excluding motor vehicles fell in the second quarter. The book value of manufacturing and trade inventories (excluding motor vehicles) stepped up modestly in July from the second-quarter level, but the ratio of these inventories to sales held steady. The U.S. international trade deficit widened in July, as a surge in the value of imports of goods and services more than offset strong growth in exports. Imports in July were led by a rapid increase in imports of oil, reflecting both higher volumes and higher prices, and were supported by a rise in imports of industrial supplies, capital goods, and services. The strength in exports was broadly based but benefited in particular from robust exports of automotive products. Economic indicators pointed to a marked deceleration of economic activity in the advanced foreign economies. In the second quarter, gross domestic product (GDP) was flat in Canada and the United Kingdom and fell in both Japan and the euro area. In July, employment continued to weaken in Japan, and retail sales fell in the euro area. Headline inflation in the major advanced foreign economies stayed elevated. Data received over the intermeeting period showed a further slowing of growth in emerging market economies. For Mexico, anemic growth in the second quarter followed a slight contraction in the first. In Asia, output decelerated significantly in the second quarter, as growth moderated in China and weakened more sharply in several other economies. Headline inflation rose in some developing countries but fell in others. Headline consumer prices in the United States declined slightly in August after having risen rapidly during the preceding three months. Energy prices dropped steeply, and the rate of increase in food prices moderated somewhat. Core consumer prices rose a bit more slowly in August than they had in June and July. Excluding food and energy, producer prices rose modestly in August, although prices for capital goods other than motor vehicles and high-tech equipment posted a large increase. During recent months, some cost pressures eased as the prices of crude oil and other commodities declined and non-oil import prices decelerated. Some measures of inflation expectations were down notably over the intermeeting period. Measures of hourly labor compensation continued to increase moderately with no sign of acceleration. At its August meeting, the Federal Open Market Committee (FOMC) kept the target federal funds rate unchanged at 2 percent. The Committee's statement noted that economic activity expanded in the second quarter, partly reflecting growth in consumer spending and exports. However, labor markets had softened further and financial markets remained under considerable stress. Tight credit conditions, the ongoing housing contraction, and elevated energy prices were likely to weigh on economic growth over the next few quarters. The Committee stated that, over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth. Inflation had been high, spurred by the earlier increases in the prices of energy and some other commodities, and some indicators of inflation expectations had been elevated. The Committee expected inflation to moderate later this year and next year, but the inflation outlook remained highly uncertain. Although downside risks to growth remained, the upside risks to inflation were also of significant concern to the Committee. The Committee indicated that it would continue to monitor economic and financial developments and would act as needed to promote sustainable economic growth and price stability. Over the intermeeting period, investors marked down considerably their expectations for the path of monetary policy. Policy expectations were largely unaffected by the outcome of the August FOMC meeting, as the Committee's decision to leave the target federal funds rate unchanged was broadly anticipated and the accompanying statement was reportedly in line with investor expectations. Subsequently, the expected future path of monetary policy dropped amid increasing concerns about the health of financial institutions. The market's expectation for the onset of policy tightening was also pushed back as labor market conditions weakened and oil prices declined further, developments that were seen as tempering inflation pressures. Yields on nominal Treasury coupon securities declined over the intermeeting period while yields on inflation-indexed Treasury securities were roughly unchanged, which left inflation compensation noticeably lower. The decrease in inflation compensation was most pronounced at shorter horizons, likely reflecting the drop in oil prices. Conditions in short-term funding markets remained strained for most of the intermeeting period and deteriorated considerably just before the FOMC meeting. The spreads of London interbank offered rates, or Libor, over comparable-maturity overnight index swap rates, especially those beyond the one-month horizon, moved up from already-high levels. In the commercial paper market, spreads on lower-rated nonfinancial and asset-backed commercial paper fluctuated in an elevated range, as did spreads on financial paper. Depository institutions continued to bid aggressively for 28-day funds at the Term Auction Facility (TAF) during the intermeeting period, and demand for funds was strong at both of the 84-day TAF auctions. The amount of overnight primary credit outstanding was about unchanged at a high level, while term primary credit continued to rise. No credit was extended through the Primary Dealer Credit Facility until the final week of the intermeeting period. Conditions in markets for repurchase agreements, or repos, against some types of collateral deteriorated over the intermeeting period, and liquidity in non-Treasury, non-agency term repo markets remained poor. In longer-term credit markets, yields on investment-grade corporate bonds were not much changed, but yields on speculative-grade bonds rose somewhat. Risk spreads on corporate bonds jumped, as comparable-maturity Treasury yields dropped; most of the increase in risk spreads occurred late in the intermeeting period. Corporate bond issuance moderated a bit further in August, while growth of bank lending to businesses was tepid. Broad equity indexes declined over the intermeeting period. Financial sector equity indexes were volatile and ended the period down sharply. Liquidity conditions in the money markets of major foreign economies deteriorated over the intermeeting period. Sovereign bond yields moved down, mainly reflecting declines in inflation compensation. On a trade-weighted basis, the dollar rose against the currencies of our major trading partners. M2 contracted slightly in August following a generally weak performance over the previous few months. The August data showed a considerable reallocation among the components of M2. Liquid deposits and retail money funds fell while small time deposits surged as some banks and thrifts bid aggressively for these deposits. On September 7, the Treasury Department and the Federal Housing Finance Agency announced that Fannie Mae and Freddie Mac had been placed into conservatorship and that Treasury would establish a backstop lending facility for the government-sponsored enterprises (GSEs), purchase preferred stock in the GSEs as necessary to ensure that they maintain a positive net worth, and initiate a program to purchase mortgage-backed securities (MBS). Following the announcement, spreads on Fannie Mae and Freddie Mac debt and on agency MBS narrowed, while share prices for their common and preferred stock fell. Auctions of GSE debt following the conservatorship announcement reportedly attracted heavy demand, but market participants indicated that liquidity in the secondary market for GSE debt remained somewhat lower than normal. Before the conservatorship announcement, interest rates on 30-year fixed-rate mortgages had declined less than those on comparable-maturity Treasury securities, leaving mortgage spreads at the top of their range of the past two decades. Following the Treasury announcement, rates and spreads on new conforming fixed-rate mortgages dropped sharply. In the days immediately before the FOMC meeting, Lehman Brothers Holdings filed for bankruptcy, Bank of America announced that it would acquire Merrill Lynch, and market concerns about the health of other financial institutions increased. To address potential liquidity pressures in financial markets associated with these developments, the Federal Reserve announced several additional initiatives, including an expansion of collateral eligible for the Primary Dealer Credit Facility and the Term Securities Lending Facility (TSLF), increases in the size and frequency of TSLF auctions, and a temporary relaxation of the limitations on broker-dealers' access to funding from affiliated depository institutions. In addition, a consortium of 10 major banks announced the creation of a liquidity pool from which participants could draw collateralized loans. Despite these enhanced liquidity measures, short-term funding markets remained severely strained, reflecting investors' heightened concerns about the financial condition of other large financial firms, including American International Group, a prominent insurance and financial services company. To further support market liquidity and to help keep the federal funds rate near its target, the Federal Reserve conducted very large reserve-adding open market operations the day before and the morning of the FOMC meeting. Market expectations for the path of monetary policy moved down sharply. Yields on nominal Treasury securities dropped steeply, and credit spreads on corporate bonds widened significantly. Equity markets were volatile and equity prices dropped considerably. In the forecast prepared for the meeting, the staff left its projection for real GDP growth in the second half of 2008 little changed from the previous meeting, but it marked down its forecast for 2009 slightly. Real GDP was estimated to have increased at a solid pace in the second quarter; however, the available indicators pointed to a sharp deceleration in economic activity in the third quarter. Consumer spending softened appreciably in recent months, and housing construction remained on a steep downtrend. Some of the weakness in the household sector appeared to reflect the ongoing deterioration in the labor market, but the effects of the earlier run-up in oil prices, weakened balance sheets, and restrictive financial conditions also likely put the finances of many households and businesses under pressure. The staff continued to expect that real GDP would advance slowly in the fourth quarter of 2008 and at a faster rate in 2009, but still less than that of its potential. Real GDP growth was expected to pick up to slightly above the rate of potential growth in 2010, as the restraint on household and business spending associated with financial market turmoil gradually eases and the contraction in the housing sector comes to an end. The staff's outlook for both core and overall PCE inflation over the next two years also changed little. The staff continued to project that core inflation would edge lower in 2009 and 2010 as the prices of imports, energy, and other commodities decelerate and the margin of resource slack remains relatively wide. In their discussion of the economic situation and outlook, FOMC participants noted that financial market strains had intensified in the days before the meeting and that these strains could potentially weigh further on economic activity. Participants agreed that economic growth was likely to be sluggish in the second half of 2008. Several participants had marked down their near-term outlook for economic activity and some judged that downside risks had increased, but most continued to expect a gradual recovery in 2009. Despite concern that recent high inflation readings suggested that price pressures could persist, participants generally thought that the outlook for inflation had improved, mainly reflecting the recent declines in the prices of oil and other commodities, the stronger foreign exchange value of the dollar, and the weakening of the labor market. Participants noted that stresses on financial markets and institutions had increased. The announcement of government support for Fannie Mae and Freddie Mac appeared to have had a positive impact on financial markets, most importantly on the primary and secondary markets for residential mortgages. However, the bankruptcy of Lehman Brothers and market concerns about other financial institutions were causing a wide variety of financial firms to experience increasing difficulty in obtaining funding and raising capital, a development that was likely to lead to a further tightening of credit availability to households and firms. Meeting participants were highly uncertain about future financial developments and their implications for the broader economy. There was agreement that the liquidity facilities established by the Federal Reserve over the past year had been helpful in ameliorating strains in financial markets, but it was also noted that the capital of banks and other financial institutions would need to be bolstered in order to strengthen the functioning of the financial system and ease constraints on credit. Strains on the financial system, and their interactions with housing developments and the real economy more broadly, continued to restrain aggregate demand and pose substantial downside risks to the expected path for economic activity. The fall in employment in August highlighted concerns that an adverse dynamic was taking hold, in which economic weakness increased financial firms' losses, leading to tighter credit conditions and thus causing a further softening in economic activity. However, some participants cited indications that the pace of decline in house prices might begin to slow in coming months, which would serve to limit the strains on lenders. Mortgage rates had fallen after action on the GSEs, inventories of houses for sale had fallen, and reports from contacts in some parts of the nation suggested a possible bottoming of the housing sector might not be far off, although the differences in the prospects for housing across states and regions seemed to be large. All in all, the contraction in the housing sector and the adverse implications for the performance of mortgage-related financial assets continued to represent a drag on economic performance. Recent readings on consumer spending had been weak despite the tax rebates, which were mostly paid out by mid-July; these indicators suggested that consumption may remain soft as the effects of the stimulus fade over the near term. Falling real estate prices were likely to continue to reduce household wealth, and the eroding quality of consumer loans had the potential to lead to a further tightening of credit conditions. Many participants worried that the deterioration in labor market conditions over the summer would damp the growth of income and depress consumer confidence, further holding back consumption. Business spending had held up well over the summer, and inventories appeared to be well managed. However, reports from business contacts suggested that new commercial real estate projects were difficult to finance. With credit conditions generally tight and economic prospects relatively uncertain, investment spending was likely to be on the soft side going forward. Foreign economic growth had slowed in recent months and the dollar had risen broadly; both of these developments suggested that the contributions to U.S. GDP growth from net exports would likely be less strong than it had been of late. Some participants noted that financial strains were increasing in many foreign countries. However, a beneficial side effect of the global slowdown was the falling prices of oil and other commodities, which would help to bolster real incomes of U.S. households. Participants generally were somewhat more confident about the outlook for some moderation in inflation over the forecast horizon. Recent substantial declines in the prices of oil and other commodities should help to contain broader price pressures in coming quarters. In addition, the effects of the stronger dollar on import prices along with increased economic slack would tend to damp inflation. Various measures of inflation expectations had declined since the last meeting, and nominal wage increases had continued to be moderate. Indeed, with solid growth in productivity, unit labor costs had been well contained. Still, reports from business contacts suggested that firms were continuing to attempt to pass through to their customers previous increases in the costs of energy and other raw materials and would resist reversing previous price increases. Participants noted that recent readings on core and headline inflation had been elevated, and they expressed concern that high inflation might become embedded in expectations and retain considerable momentum. Members agreed that keeping the federal funds rate unchanged at this meeting was appropriate. The current low real federal funds rate appeared necessary to provide adequate counterweight to the restraining effects of tight credit conditions and of continued declines in the housing market on spending and output. Committee members generally saw the current stance of monetary policy as consistent with a gradual strengthening of economic growth beginning next year, although they recognized that recent financial developments had boosted the downside risks to the economic outlook. Inflation risks appeared to have diminished in response to the declines in the prices of energy and other commodities, the recent strengthening of the dollar, and the outlook for somewhat greater economic slack, and Committee members were a bit more optimistic that inflation would moderate in coming quarters. However, the possibility that core inflation would not moderate as anticipated was still a significant concern. With substantial downside risks to growth and persisting upside risks to inflation, members judged that leaving the federal funds rate unchanged at this time suitably balanced the risks to the outlook. Some members emphasized that if intensifying financial strains led to a significant worsening of the growth outlook, a policy response could be required; however, such a response was not called for at this meeting. Indeed, it was noted that, with elevated inflation still a concern and growth expected to pick up next year if financial strains diminish, the Committee should also remain prepared to reverse the policy easing put in place over the past year in a timely fashion. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee in the immediate future seeks conditions in reserve markets consistent with maintaining the federal funds rate at an average of around 2 percent." The vote encompassed approval of the statement below to be released at 2:15 p.m.: "The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent. Strains in financial markets have increased significantly and labor markets have weakened further. Economic growth appears to have slowed recently, partly reflecting a softening of household spending. Tight credit conditions, the ongoing housing contraction, and some slowing in export growth are likely to weigh on economic growth over the next few quarters. Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth. Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities. The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain. The downside risks to growth and the upside risks to inflation are both of significant concern to the Committee. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability." Votes for this action: Mr. Bernanke, Mses. Cumming and Duke, Messrs. Fisher, Kohn, and Kroszner, Ms. Pianalto, Messrs. Plosser, Stern, and Warsh. Votes against this action: None. Ms. Cumming voted as the alternate for Mr. Geithner. It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, October 28-29, 2008. The meeting adjourned at 12:30 p.m. Notation Vote By notation vote completed on August 25, 2008, the Committee unanimously approved the minutes of the FOMC meeting held on August 5, 2008._____________________________Brian F. MadiganSecretary Return to top

2008-09-16

Statement

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent. Strains in financial markets have increased significantly and labor markets have weakened further. Economic growth appears to have slowed recently, partly reflecting a softening of household spending. Tight credit conditions, the ongoing housing contraction, and some slowing in export growth are likely to weigh on economic growth over the next few quarters. Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth. Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities. The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain. The downside risks to growth and the upside risks to inflation are both of significant concern to the Committee. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability. Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Christine M. Cumming; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Ms. Cumming voted as the alternate for Timothy F. Geithner.

2008-08-26

Minute

A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, August 5, 2008 at 8:30 a.m. PRESENT: Mr. Bernanke, ChairmanMr. Geithner, Vice ChairmanMs. DukeMr. FisherMr. KohnMr. KrosznerMr. MishkinMs. PianaltoMr. PlosserMr. SternMr. Warsh Messrs. Evans, Lacker, and Lockhart, and Ms. Yellen, Alternate Members of the Federal Open Market Committee Messrs. Bullard, Hoenig, and Rosengren, Presidents of the Federal Reserve Banks of St. Louis, Kansas City, and Boston, respectively Mr. Madigan, Secretary and EconomistMs. Danker, Deputy SecretaryMr. Skidmore, Assistant SecretaryMs. Smith, Assistant SecretaryMr. Alvarez, General CounselMr. Ashton, Assistant General CounselMr. Sheets, Economist Messrs. Connors, English, Kamin, Sniderman, and Wilcox, Associate Economists Mr. Dudley, Manager, System Open Market Account Mr. Blanchard, Assistant to the Board, Office of Board Members, Board of Governors Ms. Bailey, Deputy Director, Division of Banking Supervision and Regulation, Board of Governors Mr. Struckmeyer, Deputy Staff Director, Office of Staff Director for Management, Board of Governors Ms. Liang, Messrs. Reifschneider and Wascher, Associate Directors, Division of Research and Statistics, Board of Governors Mr. Levin, Deputy Associate Director, Division of Monetary Affairs, Board of Governors Mr. Small, Project Manager, Division of Monetary Affairs, Board of Governors Mr. Luecke, Section Chief, Division of Monetary Affairs, Board of Governors Ms. Wei, Economist, Division of Monetary Affairs, Board of Governors Ms. Low, Open Market Secretariat Specialist, Division of Monetary Affairs, Board of Governors Mr. Connolly, First Vice President, Federal Reserve Bank of Boston Messrs. Fuhrer and Judd, Executive Vice Presidents, Federal Reserve Banks of Boston and San Francisco, respectively Messrs. Altig, Hakkio, Rasche, and Sullivan, Senior Vice Presidents, Federal Reserve Banks of Atlanta, Kansas City, St. Louis, and Chicago, respectively Messrs. Danzig and Duca, Vice Presidents, Federal Reserve Banks of New York and Dallas, respectively Mr. Weber, Senior Research Officer, Federal Reserve Bank of Minneapolis Mr. Hetzel, Senior Economist, Federal Reserve Bank of Richmond Mr. Sill, Economic Advisor, Federal Reserve Bank of Philadelphia Mr. Del Negro, Officer, Federal Reserve Bank of New York The Manager of the System Open Market Account reported on recent developments in foreign exchange markets. There were no open market operations in foreign currencies for the System's account in the period since the previous meeting. The Manager also reported on developments in domestic financial markets and on System open market operations in government securities and federal agency obligations during the period since the previous meeting. By unanimous vote, the Committee ratified these transactions. The information reviewed at the August meeting indicated that the economy expanded at a moderate pace in the second quarter, but recent financial market developments highlighted some of the stresses that the economy faced going forward. Both consumer and business spending recorded gains in the second quarter, and net exports contributed importantly to the rise in real gross domestic product (GDP). However, residential construction continued to fall sharply, the labor market weakened further, and industrial production declined. Core consumer price inflation remained relatively stable, while headline inflation was elevated as a result of large increases in food and energy prices. Labor demand continued to contract in July. Private nonfarm payroll employment fell in July at a pace only a bit less than the average monthly rate during the first six months of the year. By industry, the pattern of job losses was roughly similar to those earlier in the year, although July's report showed a smaller decline in construction than earlier. Nonbusiness services, which include health and education, remained the only notable source of net additions to employment. Both the average workweek and aggregate hours edged down in July. The unemployment rate rose in July and was about 1 percentage point above its level of a year earlier, while the labor force participation rate was about unchanged. Industrial production declined in the second quarter after having been flat over the previous two quarters. Motor vehicle assemblies tumbled in the second quarter because of soft demand and the effects of strikes. Production of high-tech equipment continued to expand at a moderate pace; however, the available indicators of high-tech manufacturing activity pointed to slower production in the current quarter. The output of other manufacturing industries contracted, on balance, in the second quarter, and indicators of near-term production generally pointed to further declines, including a sizable retrenchment in the scheduled production of motor vehicles. The factory utilization rate held steady in June at a rate below its long-run average but was still well above its low rate from 2001 through 2002. Real personal consumption expenditures (PCE) rose modestly in the second quarter after posting weak gains in the previous two quarters. However, real outlays for goods other than motor vehicles dropped noticeably in June after three months of robust gains. Sales of motor vehicles, which had begun to weaken earlier in the year, fell sharply in June and again in July. Tax rebates provided a notable, albeit temporary boost to income since the end of April, but real disposable income excluding rebates was essentially flat in the second quarter. The ratio of wealth to income likely declined again in the second quarter, as equity prices declined, on balance, and house prices continued to fall. Consumer sentiment rose a bit in July but remained at a depressed level. Residential construction activity continued to descend rapidly but at a somewhat slower pace than during the second half of last year. Single-family housing starts fell further in June, leaving the pace of construction in this sector well below its December reading. Starts of multifamily homes jumped in June to a level well above the range of readings seen over the past two years. However, available information suggested that this increase could be traced to more-stringent building codes that took effect in New York City on July 1, which apparently led developers to move up some planned apartment projects. Even though cuts in new construction continued to trim the level of new home inventories, the months' supply of new homes remained quite high because of the ongoing reductions in the demand for new houses. Sales of existing single-family homes fell in June. Tight conditions in the mortgage credit markets continued to restrain housing demand, particularly for borrowers seeking nonconforming mortgages. House prices remained on a downward trajectory. In the business sector, real spending on equipment and software declined in the second quarter as outlays on transportation equipment dropped sharply. Spending on computers and software rose at a moderate rate in the second quarter, while outlays on other equipment improved a bit last quarter after having declined in the preceding two quarters. Data through June continued to show a robust increase in nonresidential construction activity. However, vacancy rates for commercial properties ticked up in the first quarter, and the architectural billings index registered a string of weak readings from February to June. Real nonfarm inventories excluding motor vehicles fell sharply in the second quarter. The ratio of book-value inventories to sales (excluding motor vehicles) ticked down again in May. The U.S. international trade deficit narrowed in May, as a large increase in exports of goods and services more than offset a moderate increase in imports. Most major categories of non-oil imports rose in May; imports of consumer goods increased rapidly. In contrast, the value of petroleum imports fell back despite higher prices, and imports of automotive products also fell. The increase in exports was supported by strong exports of industrial supplies, particularly petroleum products, and services. Across the advanced foreign economies, information received since the last meeting pointed to subdued growth in the second quarter and increasing inflation pressures. Weak second-quarter data on industrial production and sentiment in the euro area as well as on consumer expenditures and exports in Japan suggested that the first-quarter strength in output growth was not sustained. Conditions worsened considerably in the United Kingdom, with a deepening slump in the housing sector. In all the major advanced foreign economies, rising food and fuel prices continued to drive overall inflation to recent highs, but core measures of inflation generally rose only modestly. Recent indicators for emerging market economies pointed to some slowing of growth in the second quarter. Real GDP growth in China moderated but remained strong. Incoming data suggested further slowing elsewhere in emerging Asia, and second-quarter activity appeared to have remained sluggish in Mexico. Headline inflation rose further in much of the developing world, largely owing to higher food and energy prices, and several countries continued to face upward pressure on core inflation as well. Headline consumer price inflation in the United States stepped up in recent months, largely as a result of sizable increases in food and energy prices. Excluding these categories, core consumer price inflation was elevated in June but, on balance, was running this year at about the same rate as last year. Some survey-based measures of year-ahead inflation expectations moved up sharply in recent months; longer-term inflation expectations were little changed recently but remained above their levels at the end of 2007. Excluding food and energy, sharp increases in the prices of products and services at earlier stages of processing continued to put upward pressures on business costs and consumer prices. Unit labor costs apparently continued to increase at a restrained pace during the second quarter, reflecting only moderate gains in worker compensation and relatively strong productivity performance, with little sign of higher overall inflation passing through to higher worker compensation. At its June 24-25 meeting, the Federal Open Market Committee (FOMC) kept its target for the federal funds rate at 2 percent. The Committee's statement noted that recent information indicated that overall economic activity continued to expand, partly because of some firming in household spending. However, labor markets softened further and financial markets remained under considerable stress. Tight credit conditions, the ongoing housing contraction, and the rise in energy prices were likely to weigh on economic growth over the next few quarters. The Committee expected inflation to moderate later this year and next. However, in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remained high. The Committee stated that the substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help promote moderate growth over time. Although downside risks to growth remained, they appeared to have diminished somewhat, and the upside risks to inflation and inflation expectations increased. The Committee indicated that it would continue to monitor economic and financial developments and would act as needed to promote sustainable economic growth and price stability. The market's expected path of monetary policy moved down following the announcement of the Committee's decision at its June meeting to leave the target federal funds rate unchanged. Although the decision was largely anticipated, the policy statement was reportedly viewed by investors as placing more emphasis on the downside risks to growth than they had anticipated. Subsequently, the semiannual Monetary Policy Report to the Congress and the accompanying testimony also led investors to mark down the expected path for the federal funds rate, as did intensifying concerns about the health of financial institutions and the outlook for the housing-related government-sponsored enterprises (GSEs). Consistent with the revision in policy expectations, yields on short- and medium-term nominal Treasury coupon securities fell over the intermeeting period. Yields on long-term Treasury securities declined less than those on shorter-term instruments, and the yield curve steepened. Measures of shorter-horizon inflation compensation derived from yields on inflation-indexed Treasury securities dropped over the intermeeting period as energy prices reversed some of their earlier rise, while measures of longer-term inflation compensation rose slightly. Functioning in the interbank funding markets remained strained over the intermeeting period. Spreads of the London interbank offered rate, or Libor, over comparable-maturity overnight index swap rates were unchanged to slightly higher, and spreads on lower-rated nonfinancial and asset-backed commercial paper remained well above historical norms. Depository institutions' use of both overnight and term primary credit borrowing continued to be strong during the intermeeting period, peaking in late June amid quarter-end pressures. However, new extensions of credit through the Primary Dealer Credit Facility (PDCF) were negligible during July. On July 30, the Board of Governors and the FOMC announced enhancements to existing liquidity facilities, including extension of the PDCF and the Term Securities Lending Facility through January 30, 2009. Conditions in the market for Treasury repurchase agreements were fairly stable, although there was some deterioration of conditions in the market for agency collateral. In longer-term credit markets, yields on both investment- and speculative-grade corporate bonds rose over the intermeeting period even though comparable-maturity Treasury yields declined slightly, which resulted in a widening of already elevated spreads. Corporate bond issuance slowed further, as did lending by banks to businesses and households, and issuance of leveraged loans remained very weak. Broad equity price indexes were volatile and declined modestly, on net, between the June and August FOMC meetings. Stock prices of financial firms fell sharply in mid-July but subsequently recouped most of those losses. Energy sector stocks significantly underperformed the broad indexes owing to recent declines in oil prices. Uncertainties about the financial condition of Fannie Mae and Freddie Mac added to market worries about the potential consequences of financial strains for the broader economy over the intermeeting period. On July 13, the Treasury Department proposed a plan to support the liquidity and solvency of the two GSEs, and the Board of Governors of the Federal Reserve System announced that the Federal Reserve Bank of New York was authorized to lend to the two institutions if necessary, reducing somewhat market concerns about the GSEs. Concerns eased further as Congress passed legislation, which was subsequently signed by the President, authorizing the Treasury to provide liquidity and capital to the GSEs. Over the intermeeting period, spreads of rates on conforming residential mortgages over those on comparable-maturity Treasury securities moved higher. Offer rates on 30-year jumbo mortgages also rose, and credit for nonconforming mortgages remained difficult to obtain. In the secondary market, issuance of mortgage-backed securities by GSEs appeared to have slowed in July from its strong second-quarter pace, while issuance of securities backed by nonconforming loans and of commercial mortgage-backed securities remained nil. Pressures in the money markets of many major foreign economies eased slightly over the intermeeting period. Yields on sovereign debt in the advanced foreign economies fell, mainly because of declines in inflation compensation. The trade-weighted index of the dollar against the currencies of major trading partners rose a bit on net. M2 expanded at a moderate pace in July, reversing the deceleration in May and June. The expansion was broad based, reflecting an acceleration in liquid deposits as well as renewed inflows to retail money market mutual funds and small time deposits. In the forecast prepared for the meeting, the staff marked down its forecast of real GDP growth in the second half of 2008 and in 2009. Although the increase in real GDP in the second quarter was a bit faster than anticipated at the time of the June meeting, the labor market continued to weaken significantly, financial conditions remained unfavorable, consumer and business confidence was downbeat, and manufacturing activity was contracting. All told, the staff continued to expect that real GDP would rise at less than its potential rate through the first half of next year. Nonetheless, real GDP growth was anticipated to return to its potential rate in the second half of 2009 as housing activity leveled out and financial conditions became less restrictive. Core PCE price inflation was expected to pick up somewhat in the second half of this year, mostly as a result of the upward pressures from this year's run-ups in prices of energy and imports. Core inflation was then expected to edge down in 2009 as the impetus from prior increases in the prices of imports, energy, and other commodities abated and the margin of slack in resource use widened. In their discussion of the economic situation and outlook, many FOMC participants noted that recent developments suggested that economic activity was likely to remain damped for several quarters. Although economic growth in the second quarter had apparently been boosted by fiscal stimulus, resilience in consumption spending even before tax rebates were distributed, and robust gains in exports, recent indicators pointed to a near-term deceleration in household spending and to softer export demand. Moreover, increasing concerns about financial institutions had contributed to a widening of some risk spreads and a further tightening of credit to households and businesses. Growth in overall economic activity was generally expected to be weak during the remainder of 2008 before recovering modestly next year, and nearly all meeting participants saw continuing downside risks to growth. Recent readings on inflation had been high, but growth in unit labor costs had remained subdued and commodity prices had declined of late. Accordingly, most participants anticipated that inflation would moderate in coming quarters. However, participants also expressed significant concerns about the upside risks to inflation, particularly the risk that longer-term inflation expectations could become unmoored. Many participants referred to the adverse financial sector developments that had occurred over the intermeeting period. Heightened investor apprehension about the viability of Fannie Mae and Freddie Mac had eased following legislative action, but pressures on these firms continued. Reflecting these strains, interest rates on residential mortgages had moved upward, a development that was seen as potentially exacerbating the contraction in the housing sector. Commercial banks had reported that terms and standards had been tightened on nearly all categories of loans. Declining mortgage asset values increased capital pressures on lenders exposed to real estate markets. While some financial institutions had strengthened their balance sheets with new capital issues, raising new capital had become increasingly difficult. Moreover, broad equity price indexes had declined and borrowing costs for nonfinancial firms had increased, including a recent rise in corporate bond yields across most risk categories. Many participants believed that these developments were likely to restrain aggregate demand and economic growth. Others, however, thought that the extent of such adverse effects was likely to be limited, noting that bank lending had continued to grow at a moderate pace and that consumption and business capital spending had increased in the second quarter despite the tightening of credit terms. While consumer spending had been bolstered temporarily by the effects of the tax rebates, retail sales had weakened during late spring and auto sales had dropped sharply in both June and July. The unemployment rate jumped during the intermeeting period, and participants generally anticipated that payroll employment would decline further in coming months. For example, automotive parts suppliers in one District had reported plans for laying off workers, idling production, and closing several plants. Lower equity prices and the ongoing deterioration in house prices had reduced household wealth significantly, while real incomes had been diminished by earlier increases in the prices of food and energy. All of these factors--in conjunction with tightened access to auto loans, home equity lines of credit, and other consumer loans--were viewed as pointing towards weak growth in personal consumption expenditures during the second half of 2008. The weaker outlook for consumer demand, along with tighter credit conditions for businesses, was expected to weigh on business spending going forward. Moreover, some signs of weakness in the commercial real estate sector were seen as suggesting a slower pace of investment in nonresidential structures over coming quarters, although that deceleration might be gradual due to the lags in the planning and execution of such projects. However, the elevated level of energy prices was boosting investment in the oil-producing industry. Growth in exports had provided substantial impetus to overall demand in the second quarter. However, many participants observed that decelerating activity in some foreign economies would tend to dampen export gains going forward. Indeed, recent indications of a slowing global economy may have contributed to the marked declines in the prices of oil and some other commodities over the intermeeting period. Participants pointed to potential interactions between financial stresses and the housing market contraction as the primary source of continuing downside risks to growth. Many participants noted that the financial system remained fragile, with some expressing continued concern about the possibility of an adverse feedback loop in which tighter conditions in the mortgage market would contribute to further declines in the housing sector and additional losses for lenders, leading to further tightening of lending terms and standards. In contrast, several other participants suggested that risks to the financial system had receded, partly as a result of the implementation by the Federal Reserve of special liquidity facilities, and that prevailing credit conditions were broadly consistent with the typical patterns observed during periods of weak growth or recession. Headline inflation was generally expected to moderate in coming quarters, reflecting importantly an anticipated leveling-out of prices for energy and other commodities. Although measures of core inflation might well edge up later this year, given the pass-through to final goods prices of earlier increases in the prices of energy and other inputs, most participants anticipated that core inflation would edge back down during 2009. Some participants reported that firms were increasingly using various pricing strategies--such as escalation clauses or the imposition of fuel surcharges--to pass higher costs on to their customers, who were apparently becoming less resistant to such price adjustments. However, one participant mentioned the difficult pricing decisions of manufacturers who face a combination of elevated input costs along with weakening demand for their products. And a number of participants noted that the outlook for slack in resource utilization should tend to limit the extent of pass-through, contain the degree of inflation spillover to goods and services without high commodity content, and reinforce the anticipated moderation in inflation. Participants expressed significant concerns about the upside risks to inflation, especially the risk that persistently high headline inflation could result in an unmooring of long-run inflation expectations. Some viewed the upside risks to inflation as having diminished modestly over the intermeeting period, mainly as a result of the drop in the prices of oil and some other commodities as well as the greater likelihood of persistent economic slack. However, others viewed these risks as having increased, particularly in light of continued elevated readings on headline inflation, the low level of the real federal funds rate, anecdotal information suggesting that firms were having more success in passing higher costs on to their customers, and some signs of an upward drift over recent months in investors' expectations and uncertainty regarding inflation over the longer run; moreover, the recent decline in energy prices might well be reversed in coming months. A number of participants worried about the possibility that core inflation might fail to moderate next year unless the stance of monetary policy was tightened sooner than currently anticipated by financial markets. In the Committee's discussion of monetary policy for the intermeeting period, members agreed that labor markets had softened further, that financial markets remained under considerable stress, and that these factors--in conjunction with still-elevated energy prices and the ongoing housing contraction--would likely weigh on economic growth in coming quarters. In addition, members saw continuing downside risks to this outlook, particularly reflecting possible further deterioration in financial conditions. Members generally anticipated that inflation would moderate; however, they emphasized the risks to the inflation outlook posed by persistent high readings on headline inflation and a possible unmooring of inflation expectations. Against this backdrop, nearly all members judged that leaving the federal funds rate unchanged at this meeting was appropriate and would most effectively promote progress toward the Committee's dual objectives of maximum employment and price stability. Most members did not see the current stance of policy as particularly accommodative, given that many households and businesses were facing elevated borrowing costs and reduced credit availability due to the effects of financial market strains as well as macroeconomic risks. Although members generally anticipated that the next policy move would likely be a tightening, the timing and extent of any change in policy stance would depend on evolving economic and financial developments and the implications for the outlook for economic growth and inflation. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee in the immediate future seeks conditions in reserve markets consistent with maintaining the federal funds rate at an average of around 2 percent." The vote encompassed approval of the statement below to be released at 2:15 p.m.: "The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent. Economic activity expanded in the second quarter, partly reflecting growth in consumer spending and exports. However, labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and elevated energy prices are likely to weigh on economic growth over the next few quarters. Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth. Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities, and some indicators of inflation expectations have been elevated. The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain. Although downside risks to growth remain, the upside risks to inflation are also of significant concern to the Committee. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability." Votes for this action: Messrs. Bernanke and Geithner, Ms. Duke, Messrs. Kohn, Kroszner, and Mishkin, Ms. Pianalto, Messrs. Plosser, Stern, and Warsh. Votes against this action: Mr. Fisher. Mr. Fisher dissented because he favored an increase in the target federal funds rate to help restrain inflation and inflation expectations, which were at risk of drifting higher. While the financial system remained fragile and economic growth was sluggish and could weaken further, he saw a greater risk to the economy from upward pressures on inflation. In his view, businesses had become more inclined to raise prices to pass on the higher costs of imported goods and higher energy costs, the latter of which were well above their levels of late 2007. Accordingly, he supported a policy tightening at this meeting. It was agreed that the next meeting of the Committee would be held on Tuesday, September 16, 2008. The meeting adjourned at 1:50 p.m. Conference CallOn July 24, 2008, the Federal Open Market Committee met in a joint session with the Board of Governors to consider several proposals to extend or enhance Federal Reserve System liquidity facilities. In light of continued significant stresses in financial markets and the experience to date with the Term Auction Facility (TAF), the Term Securities Lending Facility (TSLF), and the Primary Dealer Lending Facility (PDCF), the staff proposed modifications to these programs. The modifications included auctioning options on up to an additional $50 billion of TSLF loans and lengthening the term to maturity of all loans made under the TAF to 84 days. Contingent upon Board approval of the change to TAF loans, the Committee was asked to consider an expansion of the existing currency swap arrangement with the European Central Bank to facilitate a similar change in the term of dollar credits auctioned by the ECB. Finally, policymakers were asked to vote on extending the availability of the TSLF and PDCF past the year-end, a topic that had been discussed on a preliminary basis at the joint Board/FOMC meeting on June 25, 2008. In the discussion, meeting participants exchanged views on issues entailed in administering the TAF and term primary discount window credit. Issues regarding credit risk and collateral requirements received particular attention. Some participants raised questions about the net benefit of approving and announcing the proposed changes at this time, asking, for example, whether such an announcement could suggest that the Federal Reserve saw financial markets as more fragile than expected or whether adjustments to the liquidity facilities could cause market analysts to infer that the System intended to keep the facilities in place permanently. Most participants expressed general support for the proposals as improving the System's tools for supporting market liquidity. However, there was considerable sentiment for altering the TAF proposal to allow for both 28- and 84-day credits, and the Chairman directed the staff to confer, to consult further with policymakers, and to revise the proposal accordingly for notation votes in the near future by the Board and the FOMC. At this meeting, the Committee unanimously approved the following resolution: TSLF Extension AuthorizationThe FOMC extends until January 30, 2009, its authorizations for the Federal Reserve Bank of New York to engage in transactions with primary dealers through the Term Securities Lending Facility, subject to the same collateral, interest rate and other conditions previously established by the Committee. With Mr. Plosser dissenting, the Committee voted to approve the resolution below. Mr. Plosser dissented because he viewed the net benefit of the TSLF options as being insufficient to justify adding them to the support already being provided to market liquidity. TSLF Options AuthorizationIn addition to the current authorizations granted to the Federal Reserve Bank of New York to engage in term securities lending transactions, the Federal Open Market Committee authorizes the Federal Reserve Bank of New York to offer options on up to $50 billion in additional draws on the Facility, subject to the other terms and conditions previously established for the Facility. Mr. Lockhart voted as alternate member at this meeting. Notation VotesBy notation vote completed on July 14, 2008, the Committee unanimously approved the minutes of the FOMC meeting held on June 24-25, 2008. By notation vote completed on July 29, 2008, the Committee unanimously approved the following resolution: Swap AuthorizationThe Federal Open Market Committee directs the Federal Reserve Bank of New York to increase the amount available from the System Open Market Account under the existing reciprocal currency arrangement ("swap" arrangement) with the European Central Bank to an amount not to exceed $55 billion. Within that aggregate limit, draws of up to $25 billion are hereby authorized. The swap arrangement continues to be authorized through January 30, 2009, unless extended by the Federal Open Market Committee. _____________________________ Brian F. MadiganSecretary Return to top

2008-08-08

Statement

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent. Economic activity expanded in the second quarter, partly reflecting growth in consumer spending and exports. However, labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and elevated energy prices are likely to weigh on economic growth over the next few quarters. Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth. Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities, and some indicators of inflation expectations have been elevated. The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain. Although downside risks to growth remain, the upside risks to inflation are also of significant concern to the Committee. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability. Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Elizabeth A. Duke; 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 an increase in the target for the federal funds rate at this meeting.

N/A

Minute

A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, August 5, 2008 at 8:30 a.m. PRESENT: Mr. Bernanke, ChairmanMr. Geithner, Vice ChairmanMs. DukeMr. FisherMr. KohnMr. KrosznerMr. MishkinMs. PianaltoMr. PlosserMr. SternMr. Warsh Messrs. Evans, Lacker, and Lockhart, and Ms. Yellen, Alternate Members of the Federal Open Market Committee Messrs. Bullard, Hoenig, and Rosengren, Presidents of the Federal Reserve Banks of St. Louis, Kansas City, and Boston, respectively Mr. Madigan, Secretary and EconomistMs. Danker, Deputy SecretaryMr. Skidmore, Assistant SecretaryMs. Smith, Assistant SecretaryMr. Alvarez, General CounselMr. Ashton, Assistant General CounselMr. Sheets, Economist Messrs. Connors, English, Kamin, Sniderman, and Wilcox, Associate Economists Mr. Dudley, Manager, System Open Market Account Mr. Blanchard, Assistant to the Board, Office of Board Members, Board of Governors Ms. Bailey, Deputy Director, Division of Banking Supervision and Regulation, Board of Governors Mr. Struckmeyer, Deputy Staff Director, Office of Staff Director for Management, Board of Governors Ms. Liang, Messrs. Reifschneider and Wascher, Associate Directors, Division of Research and Statistics, Board of Governors Mr. Levin, Deputy Associate Director, Division of Monetary Affairs, Board of Governors Mr. Small, Project Manager, Division of Monetary Affairs, Board of Governors Mr. Luecke, Section Chief, Division of Monetary Affairs, Board of Governors Ms. Wei, Economist, Division of Monetary Affairs, Board of Governors Ms. Low, Open Market Secretariat Specialist, Division of Monetary Affairs, Board of Governors Mr. Connolly, First Vice President, Federal Reserve Bank of Boston Messrs. Fuhrer and Judd, Executive Vice Presidents, Federal Reserve Banks of Boston and San Francisco, respectively Messrs. Altig, Hakkio, Rasche, and Sullivan, Senior Vice Presidents, Federal Reserve Banks of Atlanta, Kansas City, St. Louis, and Chicago, respectively Messrs. Danzig and Duca, Vice Presidents, Federal Reserve Banks of New York and Dallas, respectively Mr. Weber, Senior Research Officer, Federal Reserve Bank of Minneapolis Mr. Hetzel, Senior Economist, Federal Reserve Bank of Richmond Mr. Sill, Economic Advisor, Federal Reserve Bank of Philadelphia Mr. Del Negro, Officer, Federal Reserve Bank of New York The Manager of the System Open Market Account reported on recent developments in foreign exchange markets. There were no open market operations in foreign currencies for the System's account in the period since the previous meeting. The Manager also reported on developments in domestic financial markets and on System open market operations in government securities and federal agency obligations during the period since the previous meeting. By unanimous vote, the Committee ratified these transactions. The information reviewed at the August meeting indicated that the economy expanded at a moderate pace in the second quarter, but recent financial market developments highlighted some of the stresses that the economy faced going forward. Both consumer and business spending recorded gains in the second quarter, and net exports contributed importantly to the rise in real gross domestic product (GDP). However, residential construction continued to fall sharply, the labor market weakened further, and industrial production declined. Core consumer price inflation remained relatively stable, while headline inflation was elevated as a result of large increases in food and energy prices. Labor demand continued to contract in July. Private nonfarm payroll employment fell in July at a pace only a bit less than the average monthly rate during the first six months of the year. By industry, the pattern of job losses was roughly similar to those earlier in the year, although July's report showed a smaller decline in construction than earlier. Nonbusiness services, which include health and education, remained the only notable source of net additions to employment. Both the average workweek and aggregate hours edged down in July. The unemployment rate rose in July and was about 1 percentage point above its level of a year earlier, while the labor force participation rate was about unchanged. Industrial production declined in the second quarter after having been flat over the previous two quarters. Motor vehicle assemblies tumbled in the second quarter because of soft demand and the effects of strikes. Production of high-tech equipment continued to expand at a moderate pace; however, the available indicators of high-tech manufacturing activity pointed to slower production in the current quarter. The output of other manufacturing industries contracted, on balance, in the second quarter, and indicators of near-term production generally pointed to further declines, including a sizable retrenchment in the scheduled production of motor vehicles. The factory utilization rate held steady in June at a rate below its long-run average but was still well above its low rate from 2001 through 2002. Real personal consumption expenditures (PCE) rose modestly in the second quarter after posting weak gains in the previous two quarters. However, real outlays for goods other than motor vehicles dropped noticeably in June after three months of robust gains. Sales of motor vehicles, which had begun to weaken earlier in the year, fell sharply in June and again in July. Tax rebates provided a notable, albeit temporary boost to income since the end of April, but real disposable income excluding rebates was essentially flat in the second quarter. The ratio of wealth to income likely declined again in the second quarter, as equity prices declined, on balance, and house prices continued to fall. Consumer sentiment rose a bit in July but remained at a depressed level. Residential construction activity continued to descend rapidly but at a somewhat slower pace than during the second half of last year. Single-family housing starts fell further in June, leaving the pace of construction in this sector well below its December reading. Starts of multifamily homes jumped in June to a level well above the range of readings seen over the past two years. However, available information suggested that this increase could be traced to more-stringent building codes that took effect in New York City on July 1, which apparently led developers to move up some planned apartment projects. Even though cuts in new construction continued to trim the level of new home inventories, the months' supply of new homes remained quite high because of the ongoing reductions in the demand for new houses. Sales of existing single-family homes fell in June. Tight conditions in the mortgage credit markets continued to restrain housing demand, particularly for borrowers seeking nonconforming mortgages. House prices remained on a downward trajectory. In the business sector, real spending on equipment and software declined in the second quarter as outlays on transportation equipment dropped sharply. Spending on computers and software rose at a moderate rate in the second quarter, while outlays on other equipment improved a bit last quarter after having declined in the preceding two quarters. Data through June continued to show a robust increase in nonresidential construction activity. However, vacancy rates for commercial properties ticked up in the first quarter, and the architectural billings index registered a string of weak readings from February to June. Real nonfarm inventories excluding motor vehicles fell sharply in the second quarter. The ratio of book-value inventories to sales (excluding motor vehicles) ticked down again in May. The U.S. international trade deficit narrowed in May, as a large increase in exports of goods and services more than offset a moderate increase in imports. Most major categories of non-oil imports rose in May; imports of consumer goods increased rapidly. In contrast, the value of petroleum imports fell back despite higher prices, and imports of automotive products also fell. The increase in exports was supported by strong exports of industrial supplies, particularly petroleum products, and services. Across the advanced foreign economies, information received since the last meeting pointed to subdued growth in the second quarter and increasing inflation pressures. Weak second-quarter data on industrial production and sentiment in the euro area as well as on consumer expenditures and exports in Japan suggested that the first-quarter strength in output growth was not sustained. Conditions worsened considerably in the United Kingdom, with a deepening slump in the housing sector. In all the major advanced foreign economies, rising food and fuel prices continued to drive overall inflation to recent highs, but core measures of inflation generally rose only modestly. Recent indicators for emerging market economies pointed to some slowing of growth in the second quarter. Real GDP growth in China moderated but remained strong. Incoming data suggested further slowing elsewhere in emerging Asia, and second-quarter activity appeared to have remained sluggish in Mexico. Headline inflation rose further in much of the developing world, largely owing to higher food and energy prices, and several countries continued to face upward pressure on core inflation as well. Headline consumer price inflation in the United States stepped up in recent months, largely as a result of sizable increases in food and energy prices. Excluding these categories, core consumer price inflation was elevated in June but, on balance, was running this year at about the same rate as last year. Some survey-based measures of year-ahead inflation expectations moved up sharply in recent months; longer-term inflation expectations were little changed recently but remained above their levels at the end of 2007. Excluding food and energy, sharp increases in the prices of products and services at earlier stages of processing continued to put upward pressures on business costs and consumer prices. Unit labor costs apparently continued to increase at a restrained pace during the second quarter, reflecting only moderate gains in worker compensation and relatively strong productivity performance, with little sign of higher overall inflation passing through to higher worker compensation. At its June 24-25 meeting, the Federal Open Market Committee (FOMC) kept its target for the federal funds rate at 2 percent. The Committee's statement noted that recent information indicated that overall economic activity continued to expand, partly because of some firming in household spending. However, labor markets softened further and financial markets remained under considerable stress. Tight credit conditions, the ongoing housing contraction, and the rise in energy prices were likely to weigh on economic growth over the next few quarters. The Committee expected inflation to moderate later this year and next. However, in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remained high. The Committee stated that the substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help promote moderate growth over time. Although downside risks to growth remained, they appeared to have diminished somewhat, and the upside risks to inflation and inflation expectations increased. The Committee indicated that it would continue to monitor economic and financial developments and would act as needed to promote sustainable economic growth and price stability. The market's expected path of monetary policy moved down following the announcement of the Committee's decision at its June meeting to leave the target federal funds rate unchanged. Although the decision was largely anticipated, the policy statement was reportedly viewed by investors as placing more emphasis on the downside risks to growth than they had anticipated. Subsequently, the semiannual Monetary Policy Report to the Congress and the accompanying testimony also led investors to mark down the expected path for the federal funds rate, as did intensifying concerns about the health of financial institutions and the outlook for the housing-related government-sponsored enterprises (GSEs). Consistent with the revision in policy expectations, yields on short- and medium-term nominal Treasury coupon securities fell over the intermeeting period. Yields on long-term Treasury securities declined less than those on shorter-term instruments, and the yield curve steepened. Measures of shorter-horizon inflation compensation derived from yields on inflation-indexed Treasury securities dropped over the intermeeting period as energy prices reversed some of their earlier rise, while measures of longer-term inflation compensation rose slightly. Functioning in the interbank funding markets remained strained over the intermeeting period. Spreads of the London interbank offered rate, or Libor, over comparable-maturity overnight index swap rates were unchanged to slightly higher, and spreads on lower-rated nonfinancial and asset-backed commercial paper remained well above historical norms. Depository institutions' use of both overnight and term primary credit borrowing continued to be strong during the intermeeting period, peaking in late June amid quarter-end pressures. However, new extensions of credit through the Primary Dealer Credit Facility (PDCF) were negligible during July. On July 30, the Board of Governors and the FOMC announced enhancements to existing liquidity facilities, including extension of the PDCF and the Term Securities Lending Facility through January 30, 2009. Conditions in the market for Treasury repurchase agreements were fairly stable, although there was some deterioration of conditions in the market for agency collateral. In longer-term credit markets, yields on both investment- and speculative-grade corporate bonds rose over the intermeeting period even though comparable-maturity Treasury yields declined slightly, which resulted in a widening of already elevated spreads. Corporate bond issuance slowed further, as did lending by banks to businesses and households, and issuance of leveraged loans remained very weak. Broad equity price indexes were volatile and declined modestly, on net, between the June and August FOMC meetings. Stock prices of financial firms fell sharply in mid-July but subsequently recouped most of those losses. Energy sector stocks significantly underperformed the broad indexes owing to recent declines in oil prices. Uncertainties about the financial condition of Fannie Mae and Freddie Mac added to market worries about the potential consequences of financial strains for the broader economy over the intermeeting period. On July 13, the Treasury Department proposed a plan to support the liquidity and solvency of the two GSEs, and the Board of Governors of the Federal Reserve System announced that the Federal Reserve Bank of New York was authorized to lend to the two institutions if necessary, reducing somewhat market concerns about the GSEs. Concerns eased further as Congress passed legislation, which was subsequently signed by the President, authorizing the Treasury to provide liquidity and capital to the GSEs. Over the intermeeting period, spreads of rates on conforming residential mortgages over those on comparable-maturity Treasury securities moved higher. Offer rates on 30-year jumbo mortgages also rose, and credit for nonconforming mortgages remained difficult to obtain. In the secondary market, issuance of mortgage-backed securities by GSEs appeared to have slowed in July from its strong second-quarter pace, while issuance of securities backed by nonconforming loans and of commercial mortgage-backed securities remained nil. Pressures in the money markets of many major foreign economies eased slightly over the intermeeting period. Yields on sovereign debt in the advanced foreign economies fell, mainly because of declines in inflation compensation. The trade-weighted index of the dollar against the currencies of major trading partners rose a bit on net. M2 expanded at a moderate pace in July, reversing the deceleration in May and June. The expansion was broad based, reflecting an acceleration in liquid deposits as well as renewed inflows to retail money market mutual funds and small time deposits. In the forecast prepared for the meeting, the staff marked down its forecast of real GDP growth in the second half of 2008 and in 2009. Although the increase in real GDP in the second quarter was a bit faster than anticipated at the time of the June meeting, the labor market continued to weaken significantly, financial conditions remained unfavorable, consumer and business confidence was downbeat, and manufacturing activity was contracting. All told, the staff continued to expect that real GDP would rise at less than its potential rate through the first half of next year. Nonetheless, real GDP growth was anticipated to return to its potential rate in the second half of 2009 as housing activity leveled out and financial conditions became less restrictive. Core PCE price inflation was expected to pick up somewhat in the second half of this year, mostly as a result of the upward pressures from this year's run-ups in prices of energy and imports. Core inflation was then expected to edge down in 2009 as the impetus from prior increases in the prices of imports, energy, and other commodities abated and the margin of slack in resource use widened. In their discussion of the economic situation and outlook, many FOMC participants noted that recent developments suggested that economic activity was likely to remain damped for several quarters. Although economic growth in the second quarter had apparently been boosted by fiscal stimulus, resilience in consumption spending even before tax rebates were distributed, and robust gains in exports, recent indicators pointed to a near-term deceleration in household spending and to softer export demand. Moreover, increasing concerns about financial institutions had contributed to a widening of some risk spreads and a further tightening of credit to households and businesses. Growth in overall economic activity was generally expected to be weak during the remainder of 2008 before recovering modestly next year, and nearly all meeting participants saw continuing downside risks to growth. Recent readings on inflation had been high, but growth in unit labor costs had remained subdued and commodity prices had declined of late. Accordingly, most participants anticipated that inflation would moderate in coming quarters. However, participants also expressed significant concerns about the upside risks to inflation, particularly the risk that longer-term inflation expectations could become unmoored. Many participants referred to the adverse financial sector developments that had occurred over the intermeeting period. Heightened investor apprehension about the viability of Fannie Mae and Freddie Mac had eased following legislative action, but pressures on these firms continued. Reflecting these strains, interest rates on residential mortgages had moved upward, a development that was seen as potentially exacerbating the contraction in the housing sector. Commercial banks had reported that terms and standards had been tightened on nearly all categories of loans. Declining mortgage asset values increased capital pressures on lenders exposed to real estate markets. While some financial institutions had strengthened their balance sheets with new capital issues, raising new capital had become increasingly difficult. Moreover, broad equity price indexes had declined and borrowing costs for nonfinancial firms had increased, including a recent rise in corporate bond yields across most risk categories. Many participants believed that these developments were likely to restrain aggregate demand and economic growth. Others, however, thought that the extent of such adverse effects was likely to be limited, noting that bank lending had continued to grow at a moderate pace and that consumption and business capital spending had increased in the second quarter despite the tightening of credit terms. While consumer spending had been bolstered temporarily by the effects of the tax rebates, retail sales had weakened during late spring and auto sales had dropped sharply in both June and July. The unemployment rate jumped during the intermeeting period, and participants generally anticipated that payroll employment would decline further in coming months. For example, automotive parts suppliers in one District had reported plans for laying off workers, idling production, and closing several plants. Lower equity prices and the ongoing deterioration in house prices had reduced household wealth significantly, while real incomes had been diminished by earlier increases in the prices of food and energy. All of these factors--in conjunction with tightened access to auto loans, home equity lines of credit, and other consumer loans--were viewed as pointing towards weak growth in personal consumption expenditures during the second half of 2008. The weaker outlook for consumer demand, along with tighter credit conditions for businesses, was expected to weigh on business spending going forward. Moreover, some signs of weakness in the commercial real estate sector were seen as suggesting a slower pace of investment in nonresidential structures over coming quarters, although that deceleration might be gradual due to the lags in the planning and execution of such projects. However, the elevated level of energy prices was boosting investment in the oil-producing industry. Growth in exports had provided substantial impetus to overall demand in the second quarter. However, many participants observed that decelerating activity in some foreign economies would tend to dampen export gains going forward. Indeed, recent indications of a slowing global economy may have contributed to the marked declines in the prices of oil and some other commodities over the intermeeting period. Participants pointed to potential interactions between financial stresses and the housing market contraction as the primary source of continuing downside risks to growth. Many participants noted that the financial system remained fragile, with some expressing continued concern about the possibility of an adverse feedback loop in which tighter conditions in the mortgage market would contribute to further declines in the housing sector and additional losses for lenders, leading to further tightening of lending terms and standards. In contrast, several other participants suggested that risks to the financial system had receded, partly as a result of the implementation by the Federal Reserve of special liquidity facilities, and that prevailing credit conditions were broadly consistent with the typical patterns observed during periods of weak growth or recession. Headline inflation was generally expected to moderate in coming quarters, reflecting importantly an anticipated leveling-out of prices for energy and other commodities. Although measures of core inflation might well edge up later this year, given the pass-through to final goods prices of earlier increases in the prices of energy and other inputs, most participants anticipated that core inflation would edge back down during 2009. Some participants reported that firms were increasingly using various pricing strategies--such as escalation clauses or the imposition of fuel surcharges--to pass higher costs on to their customers, who were apparently becoming less resistant to such price adjustments. However, one participant mentioned the difficult pricing decisions of manufacturers who face a combination of elevated input costs along with weakening demand for their products. And a number of participants noted that the outlook for slack in resource utilization should tend to limit the extent of pass-through, contain the degree of inflation spillover to goods and services without high commodity content, and reinforce the anticipated moderation in inflation. Participants expressed significant concerns about the upside risks to inflation, especially the risk that persistently high headline inflation could result in an unmooring of long-run inflation expectations. Some viewed the upside risks to inflation as having diminished modestly over the intermeeting period, mainly as a result of the drop in the prices of oil and some other commodities as well as the greater likelihood of persistent economic slack. However, others viewed these risks as having increased, particularly in light of continued elevated readings on headline inflation, the low level of the real federal funds rate, anecdotal information suggesting that firms were having more success in passing higher costs on to their customers, and some signs of an upward drift over recent months in investors' expectations and uncertainty regarding inflation over the longer run; moreover, the recent decline in energy prices might well be reversed in coming months. A number of participants worried about the possibility that core inflation might fail to moderate next year unless the stance of monetary policy was tightened sooner than currently anticipated by financial markets. In the Committee's discussion of monetary policy for the intermeeting period, members agreed that labor markets had softened further, that financial markets remained under considerable stress, and that these factors--in conjunction with still-elevated energy prices and the ongoing housing contraction--would likely weigh on economic growth in coming quarters. In addition, members saw continuing downside risks to this outlook, particularly reflecting possible further deterioration in financial conditions. Members generally anticipated that inflation would moderate; however, they emphasized the risks to the inflation outlook posed by persistent high readings on headline inflation and a possible unmooring of inflation expectations. Against this backdrop, nearly all members judged that leaving the federal funds rate unchanged at this meeting was appropriate and would most effectively promote progress toward the Committee's dual objectives of maximum employment and price stability. Most members did not see the current stance of policy as particularly accommodative, given that many households and businesses were facing elevated borrowing costs and reduced credit availability due to the effects of financial market strains as well as macroeconomic risks. Although members generally anticipated that the next policy move would likely be a tightening, the timing and extent of any change in policy stance would depend on evolving economic and financial developments and the implications for the outlook for economic growth and inflation. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee in the immediate future seeks conditions in reserve markets consistent with maintaining the federal funds rate at an average of around 2 percent." The vote encompassed approval of the statement below to be released at 2:15 p.m.: "The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent. Economic activity expanded in the second quarter, partly reflecting growth in consumer spending and exports. However, labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and elevated energy prices are likely to weigh on economic growth over the next few quarters. Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth. Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities, and some indicators of inflation expectations have been elevated. The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain. Although downside risks to growth remain, the upside risks to inflation are also of significant concern to the Committee. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability." Votes for this action: Messrs. Bernanke and Geithner, Ms. Duke, Messrs. Kohn, Kroszner, and Mishkin, Ms. Pianalto, Messrs. Plosser, Stern, and Warsh. Votes against this action: Mr. Fisher. Mr. Fisher dissented because he favored an increase in the target federal funds rate to help restrain inflation and inflation expectations, which were at risk of drifting higher. While the financial system remained fragile and economic growth was sluggish and could weaken further, he saw a greater risk to the economy from upward pressures on inflation. In his view, businesses had become more inclined to raise prices to pass on the higher costs of imported goods and higher energy costs, the latter of which were well above their levels of late 2007. Accordingly, he supported a policy tightening at this meeting. It was agreed that the next meeting of the Committee would be held on Tuesday, September 16, 2008. The meeting adjourned at 1:50 p.m. Conference CallOn July 24, 2008, the Federal Open Market Committee met in a joint session with the Board of Governors to consider several proposals to extend or enhance Federal Reserve System liquidity facilities. In light of continued significant stresses in financial markets and the experience to date with the Term Auction Facility (TAF), the Term Securities Lending Facility (TSLF), and the Primary Dealer Lending Facility (PDCF), the staff proposed modifications to these programs. The modifications included auctioning options on up to an additional $50 billion of TSLF loans and lengthening the term to maturity of all loans made under the TAF to 84 days. Contingent upon Board approval of the change to TAF loans, the Committee was asked to consider an expansion of the existing currency swap arrangement with the European Central Bank to facilitate a similar change in the term of dollar credits auctioned by the ECB. Finally, policymakers were asked to vote on extending the availability of the TSLF and PDCF past the year-end, a topic that had been discussed on a preliminary basis at the joint Board/FOMC meeting on June 25, 2008. In the discussion, meeting participants exchanged views on issues entailed in administering the TAF and term primary discount window credit. Issues regarding credit risk and collateral requirements received particular attention. Some participants raised questions about the net benefit of approving and announcing the proposed changes at this time, asking, for example, whether such an announcement could suggest that the Federal Reserve saw financial markets as more fragile than expected or whether adjustments to the liquidity facilities could cause market analysts to infer that the System intended to keep the facilities in place permanently. Most participants expressed general support for the proposals as improving the System's tools for supporting market liquidity. However, there was considerable sentiment for altering the TAF proposal to allow for both 28- and 84-day credits, and the Chairman directed the staff to confer, to consult further with policymakers, and to revise the proposal accordingly for notation votes in the near future by the Board and the FOMC. At this meeting, the Committee unanimously approved the following resolution: TSLF Extension AuthorizationThe FOMC extends until January 30, 2009, its authorizations for the Federal Reserve Bank of New York to engage in transactions with primary dealers through the Term Securities Lending Facility, subject to the same collateral, interest rate and other conditions previously established by the Committee. With Mr. Plosser dissenting, the Committee voted to approve the resolution below. Mr. Plosser dissented because he viewed the net benefit of the TSLF options as being insufficient to justify adding them to the support already being provided to market liquidity. TSLF Options AuthorizationIn addition to the current authorizations granted to the Federal Reserve Bank of New York to engage in term securities lending transactions, the Federal Open Market Committee authorizes the Federal Reserve Bank of New York to offer options on up to $50 billion in additional draws on the Facility, subject to the other terms and conditions previously established for the Facility. Mr. Lockhart voted as alternate member at this meeting. Notation VotesBy notation vote completed on July 14, 2008, the Committee unanimously approved the minutes of the FOMC meeting held on June 24-25, 2008. By notation vote completed on July 29, 2008, the Committee unanimously approved the following resolution: Swap AuthorizationThe Federal Open Market Committee directs the Federal Reserve Bank of New York to increase the amount available from the System Open Market Account under the existing reciprocal currency arrangement ("swap" arrangement) with the European Central Bank to an amount not to exceed $55 billion. Within that aggregate limit, draws of up to $25 billion are hereby authorized. The swap arrangement continues to be authorized through January 30, 2009, unless extended by the Federal Open Market Committee. _____________________________ Brian F. MadiganSecretary Return to top

2008-06-25

Statement

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent. Recent information indicates that overall economic activity continues to expand, partly reflecting some firming in household spending.  However, labor markets have softened further and financial markets remain under considerable stress.  Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters. The Committee expects inflation to moderate later this year and next year.  However, in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high. The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time.  Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased.  The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability. 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 an increase in the target for the federal funds rate at this meeting.

2008-07-16

Minute

A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, June 24, 2008 at 2:00 p.m. and continued on Wednesday, June 25, 2008 at 9:00 a.m. PRESENT: Mr. Bernanke, ChairmanMr. Geithner, Vice ChairmanMr. FisherMr. KohnMr. KrosznerMr. MishkinMs. Pianalto Mr. PlosserMr. SternMr. Warsh Ms. Cumming, Messrs. Evans, Lacker, and Lockhart, and Ms. Yellen, Alternate Members of the Federal Open Market Committee Messrs. Bullard, Hoenig, and Rosengren, Presidents of the Federal Reserve Banks of St. Louis, Kansas City, and Boston, respectively Mr. Madigan, Secretary and EconomistMs. Danker, Deputy SecretaryMr. Skidmore, Assistant SecretaryMs. Smith, Assistant SecretaryMr. Alvarez, General CounselMr. Baxter, Deputy General CounselMr. Sheets, Economist Mr. Stockton, Economist Messrs. Connors, English, and Kamin, Ms. Mester, Messrs. Rolnick, Rosenblum, Slifman, Tracy, and Wilcox, Associate Economists Mr. Dudley, Manager, System Open Market Account Ms. J. Johnson,1 Secretary, Office of the Secretary, Board of Governors Mr. Cole, Director, Division of Banking Supervision and Regulation, Board of Governors Mr. Struckmeyer, Deputy Staff Director, Office of Staff Director for Management, Board of Governors Mr. Blanchard, Assistant to the Board, Office of Board Members, Board of Governors Mr. Frierson,1 Deputy Secretary, Office of the Secretary, Board of Governors Ms. Bailey,1 Deputy Director, Division of Banking Supervision and Regulation, Board of Governors Mr. Clouse, Deputy Director, Division of Monetary Affairs, Board of Governors Mr. Parkinson,1 Deputy Director, Division of Research and Statistics, Board of Governors Ms. Barger,1 Deputy Director, Division of Banking Supervision and Regulation, Board of Governors Mr. Stehm,1 Associate Director, Division of Reserve Bank Operations and Payment Systems, Board of Governors Messrs. Reifschneider and Wascher, Associate Directors, Division of Research and Statistics, Board of Governors Mr. Gagnon,2 Visiting Associate Director, Division of Monetary Affairs, Board of Governors Mr. Wright, Deputy Associate Director, Division of Monetary Affairs, Board of Governors Mr. Zakrajšek, Assistant Director, Division of Monetary Affairs, Board of Governors Mr. Erceg,2 Assistant Director, Division of International Finance, Board of Governors Mr. Oliner, Senior Adviser, Division of Research and Statistics, Board of Governors Mr. Gross,1 Special Assistant to the Board, Office of Board Members, Board of Governors Ms. Tevlin,2 Senior Economist, Division of Research and Statistics, Board of Governors Mr. Ammer,2 Senior Economist, Division of International Finance, Board of Governors Ms. Beechey, Economist, Division of Monetary Affairs, Board of Governors Ms. Dykes, Project Manager, Division of Monetary Affairs, Board of Governors Mr. Luecke, Section Chief, Division of Monetary Affairs, Board of Governors Ms. Beattie,1 Assistant to the Secretary, Office of the Secretary, Board of Governors Ms. Low, Open Market Secretariat Specialist, Division of Monetary Affairs, Board of Governors Ms. Hughes,1 Staff Assistant, Office of the Secretary, Board of Governors Mr. Barron, First Vice President, Federal Reserve Bank of Atlanta Mr. Fuhrer, Executive Vice President, Federal Reserve Bank of Boston Messrs. Altig, Angulo,1 Rasche, Schweitzer, Sellon, and Weinberg, Senior Vice Presidents, Federal Reserve Banks of Atlanta, New York, St. Louis, Cleveland, Kansas City, and Richmond, respectively Messrs. Fernald and Fisher, and Ms. McLaughlin, Vice Presidents, Federal Reserve Banks of San Francisco, Chicago, and New York, respectively 1. Attended portion of the meeting relating to the supervisory report concerning investment banks and related policy issues. Return to text2. Attended portions of the meeting through the policy vote. Return to text The Manager of the System Open Market Account reported on recent developments in foreign exchange markets. There were no open market operations in foreign currencies for the System's account in the period since the previous meeting. The Manager also reported on developments in domestic financial markets and on System open market operations in government securities and federal agency obligations during the period since the previous meeting. By unanimous vote, the Committee ratified these transactions. The information reviewed at the June meeting indicated that economic activity had remained soft in recent months. Manufacturing activity had deteriorated, business investment in equipment appeared to have moved down, and residential construction had continued its steep descent. Labor market conditions had weakened further, and consumer sentiment was at historical lows, but despite these developments, consumer spending appeared resilient. Core consumer price inflation had been stable over recent months, but headline inflation had remained elevated because of further substantial increases in food and energy prices. Labor demand continued to weaken in April and May. Private payroll employment fell at a slower rate than earlier in the year, but the decline in jobs was again widespread, with the exception of nonbusiness services. As a result, aggregate hours of private production or nonsupervisory workers fell, on average, in April and May. The unemployment rate jumped from 5.0 percent in April to 5.5 percent in May and was now about a percentage point above its level of a year ago. The increase from April to May was accompanied by a rise in labor force participation, especially among young people. Industrial production contracted in April and May at a slightly faster pace than in the first quarter. Manufacturing output also fell in April and was unchanged in May; over the two months, factory production slowed across a broad range of industries. Production in the high-tech sector continued to expand but at only a modest rate. The factory utilization rate edged down further in April and May to a level below its first-quarter average and was well below its recent high in the third quarter of 2007. The growth of real consumer spending appeared to have picked up moderately from its sluggish pace in the first quarter. Real outlays on goods other than motor vehicles increased at a robust pace, on average, in April and May. However, retail purchases of motor vehicles fell to a low level. More broadly, households' financial conditions appeared to have weakened in recent months. Real disposable personal income had been rising only slowly since last summer, restrained by the gradual deterioration in labor market conditions and sharp increases in food and energy prices. The ratio of household wealth to income had dropped sharply in the first quarter, reflecting substantial net declines in broad equity prices and further depreciation of house prices. Measures of consumer sentiment fell further in April and May; the May readings from the Reuters/University of Michigan Surveys of Consumers and the Conference Board Consumer Confidence Survey were near their low points reached during the early 1990s. Activity in the housing sector remained very weak in April and May. Single-family housing starts posted further declines, leaving the pace of construction in this sector down about two-thirds from the peak in early 2006; starts of multifamily homes were a bit below their average over the last 10 years. Although production cuts in the single-family housing sector resulted in continued reductions of inventories of unsold new homes, the slow pace of sales left the ratio of unsold new homes to sales at elevated levels not seen since the early 1980s. Sales of existing homes remained little changed through April at a low level. However, the index of pending sales agreements--an indicator of existing home sales in coming months--jumped in April to its highest reading in six months. Conditions in mortgage credit markets remained tight, particularly for nonprime borrowers and for those seeking nonconforming mortgages. In the business sector, real spending on equipment and software appeared to move down a bit further in April and May following a slight decrease in the first quarter. Business outlays on transportation equipment continued to fall sharply. The data on shipments and orders of nondefense capital goods through May suggested that spending on high-tech equipment and software was expanding sluggishly, while outlays for other equipment remained weak. The slower pace of capital expenditures appeared consistent with a general deterioration of business conditions, including a deceleration of sales, a pessimistic tone across monthly surveys of business conditions, and tighter standards and terms on business credit. Real spending on nonresidential construction continued to rise in the first quarter, but at a substantially slower rate than over the previous two years. The architectural billing index plummeted recently, and vacancy rates for commercial properties ticked up. Real nonfarm inventories excluding motor vehicles rose only slightly in the first quarter, as firms cut production to keep inventories aligned with the sluggish pace of sales. The ratio of book-value inventories to sales (excluding motor vehicles) ticked down in April and had changed relatively little, on net, since the middle of 2007. Despite sharply lower sales of motor vehicles, the modest pace of production allowed inventories to fall further through May. Production at automakers was restrained by both weak demand and disruptions caused by labor disputes. The U.S. international trade deficit widened in April, as a jump in imports outweighed a rise in exports. Most categories of goods imports rebounded in April from lower levels in March, especially petroleum products, the prices of which had moved sharply higher. Imports of non-oil industrial supplies, capital goods, and automotive products also surged in April, whereas imports of consumer goods expanded more slowly. The increase in exports was broad-based, with strong increases in exports of industrial supplies, capital and consumer goods, and automotive products. Economic activity in advanced foreign economies appeared to have expanded moderately in the first quarter, but the pace of that activity varied markedly across economies. In the euro area and Japan, strong investment contributed to a sharp acceleration in output. Economic growth in the United Kingdom moderated because of a slowdown in real estate and business activities. Falling exports and inventories subtracted from Canadian output growth. Recent data pointed to broad softness across the advanced foreign economies in the second quarter, consistent with a weakening of consumer and business confidence. Indicators for emerging market economies pointed to continued solid growth in the first quarter, albeit at a slower pace than last year among Latin American economies. In particular, economic activity in Mexico slowed further in the first quarter, in the wake of weaker growth in the United States. In contrast, real output in China and India appeared to have continued expanding at the rapid rates seen in 2007. Inflation stayed high, on balance, in all regions, as recent price increases for food and energy added to global inflationary pressures. Headline consumer price inflation in the United States remained elevated in April and May, mostly because of large increases in food and energy prices. Excluding these categories, core prices rose at a relatively subdued rate in these two months. Average hourly earnings increased in April and May at a slower pace than in the first quarter, bringing the change over the 12 months ending in May below the pace over the previous 12 months. The employment cost index for hourly compensation rose moderately in the first quarter and at a similar rate to recent years. At its April 29-30 meeting, the Federal Open Market Committee (FOMC) lowered its target for the federal funds rate 25 basis points, to 2 percent. In addition, the Board of Governors approved a decrease of 25 basis points in the discount rate, to 2-1/4 percent. The Committee's statement noted that recent information indicated that economic activity remained weak; household and business spending had been subdued, and labor markets had softened further. Financial markets remained under considerable stress, and tight credit conditions and the deepening housing contraction were likely to weigh on economic growth over the next few quarters. Although readings on core inflation had improved somewhat, energy and other commodity prices had increased, and some indicators of inflation expectations had risen in recent months. The Committee expected inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook remained high, and the Committee noted that it would be necessary to continue to monitor inflation developments closely. The Committee stated that the substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity. The Committee indicated that it would continue to monitor economic and financial developments and act as needed to promote sustainable economic growth and price stability. The expected path of monetary policy moved down following the Committee's decision at its April meeting to reduce the target federal funds rate by 25 basis points. Although the decision had largely been anticipated by financial markets, investors had assigned some odds to an unchanged target rate. Subsequently, money market futures rates rose substantially, on net, as stronger-than-expected data on spending and on labor markets along with somewhat improved conditions in financial markets appeared to impart greater confidence about prospects for economic activity. Nominal Treasury yields also rose noticeably, and the Treasury yield curve flattened. Measures of short-term inflation compensation derived from yields on inflation-indexed Treasury securities increased over the intermeeting period, due in part to sharply higher prices for oil and agricultural commodities. Measures of longer-term inflation compensation remained around the middle of their recent elevated range. Some survey measures of households' expectations of near-term inflation rose sharply, while survey measures of longer-term expectations ranged from unchanged to slightly higher. Conditions eased somewhat in some U.S. financial markets over the intermeeting period but nonetheless remained strained. Functioning of short-term funding markets showed some improvement; spreads in interbank funding markets generally declined, as did spreads on lower-rated commercial paper. However, liquidity in the market for interbank loans at maturities beyond three months remained thin, and the spreads quoted on those instruments were little changed. Demand for funds from the Term Auction Facility remained substantial, but stop-out rates relative to minimum bid rates declined considerably relative to prior auctions, likely in response to increased auction sizes. Depository institutions' use of primary credit borrowing increased, on balance, over the intermeeting period. Credit outstanding through the Primary Dealer Credit Facility declined significantly over the intermeeting period. Conditions in the market for Treasury repurchase agreements appeared to improve somewhat, but conditions were still poor for lower-quality collateral. Supported by sales and redemptions of Treasury securities from the System Open Market Account and exchanges under the Term Securities Lending Facility, yields on overnight Treasury repurchase agreements were around typical spreads to the effective federal funds rate during much of the intermeeting period, but "haircuts" applied by lenders on non-Treasury collateral remained elevated. Term Securities Lending Facility auctions held since the April FOMC meeting were generally undersubscribed. In longer-term credit markets, yields on investment- and speculative-grade corporate bonds had risen significantly since the end of April but by slightly less than yields on comparable-maturity Treasury securities, implying a further modest narrowing of credit spreads. Corporate bond issuance surged in May, as some nonfinancial firms reduced their reliance on short-term debt in favor of bond financing. Commercial paper outstanding declined, and business lending by banks decelerated, partly reflecting continued low issuance of leveraged loans as well as tighter credit standards and terms at banks. Over the intermeeting period, spreads of rates on conforming residential mortgages over comparable-maturity Treasury securities remained about flat. Spreads on jumbo mortgages, however, widened somewhat and credit availability for jumbo-mortgage borrowers continued to be tight. In the secondary market, issuance of mortgage-backed securities by government-sponsored enterprises was strong, but issuance of securities backed by nonconforming residential mortgages and commercial mortgages remained low. Broad stock prices were somewhat volatile but declined modestly, on net, over the intermeeting period. The surge in oil prices weighed on equity prices outside of the energy sector, and a more pessimistic outlook for future earnings in the financial sector caused stocks of financial institutions to decline significantly. Conditions in the money markets of many major foreign economies remained strained, showing little improvement since late April despite ongoing activities of foreign central banks aimed at easing liquidity pressures in funding markets. Yields on sovereign debt in the advanced foreign economies moved up approximately in line with increases in comparable Treasury yields in the United States. The trade-weighted foreign exchange value of the dollar against major currencies rose. M2 rose much more slowly in April and May than in the first quarter. The deceleration seemed to reflect primarily an unwinding of heightened demand for the relative safety and liquidity of money market mutual funds that had boosted M2 in prior months. In the forecast prepared for the meeting, the staff raised its projection for the growth of real gross domestic product (GDP) for 2008. The available indicators of spending, particularly those for consumption and business investment, suggested that economic activity in the first half of the year had been somewhat firmer than previously expected. The staff projection prepared for the meeting pointed to modest expansion in real GDP in the first half of 2008 followed by a slight slowdown in growth in the second half, when several factors were likely to restrain spending, including lower household wealth, slower real income growth due to sharply higher oil prices, and tight credit conditions. The pace of economic activity was projected to pick up in 2009 as those effects waned and weakness in housing construction abated. Despite this acceleration, the trajectory of economic growth anticipated through 2009 implied noticeable slack in resource utilization. The staff's projection for price inflation in core personal consumption expenditures (PCE) for 2008 as a whole was unchanged; recent readings on core PCE inflation were better than anticipated and led the staff to lower its projection for the first half of the year. But some of the recent improvement was seen as reflecting transitory factors, and the forecast of core inflation for the second half of this year and next year was marked up to incorporate the likely pass-through of the recent jumps in the prices of energy and other commodities, and the reversal of these transitory factors. The further large increase in energy prices also prompted an upward revision of the forecast of headline PCE inflation in the second half of 2008, and headline inflation was expected to exceed core inflation by a considerable margin this year. However, in view of a projected leveling-out of energy prices and the anticipated slack in resource utilization, headline inflation was expected to decline considerably in 2009 from its pace in the second half of 2008, and core inflation was forecasted to edge lower. In conjunction with the FOMC meeting in June, all meeting participants (Federal Reserve Board members and Reserve Bank presidents) provided projections for economic growth, the unemployment rate, and inflation for the years 2008 through 2010. The projections are described in the Summary of Economic Projections, which is attached as an addendum to these minutes. A number of participants noted that, given the recent large adverse shocks to output and inflation, their projections even late in the forecast period did not fully reveal their perceptions of longer-run sustainable rates of economic growth and unemployment or the measured rates of inflation that would be consistent with price stability. In this context, participants discussed several possible refinements of the Committee's approach to projections that could provide a clearer indication of participants' views about these variables and agreed to consider this matter further. In their discussion of the economic situation and outlook, FOMC participants noted that spending in recent months had evidently been less weak than anticipated, leading participants to revise up their assessment of economic growth in the first half of 2008. Nonetheless, most participants judged that the slightly firmer path of spending did not presage a near-term strengthening of the expansion. Economic activity would probably continue to expand slowly over the next several quarters, restrained by a range of factors, including strains in financial markets and institutions and the resulting tightness of credit conditions; ongoing weakness in the housing sector; and the increases in energy and agricultural commodity prices. And, although the incoming data suggested reduced odds that these factors would cause an appreciable contraction of economic activity in the near term, participants continued to see significant downside risks to growth. At the same time, however, the outlook for inflation had deteriorated. Recent increases in energy and some other commodity prices would boost inflation sharply in coming months. A leveling-out of energy prices and continued slack in resource utilization were expected to lead inflation to moderate in 2009 and 2010. However, participants had become more concerned about upside risks to the inflation outlook--including the possibility that persistent advances in energy and food prices could spur increases in long-run inflation expectations. Although financial market conditions generally appeared to have improved somewhat over the intermeeting period, most participants viewed markets as remaining under considerable stress. Some participants noted that the availability of the liquidity facilities that the Federal Reserve had introduced in recent months had probably bolstered the confidence of investors and lenders and thus was likely responsible for part of the improvement in market functioning. Term spreads in interbank funding markets had declined, but remained elevated by historical standards. The leveraged loan market had improved somewhat and corporate bond issuance had been strong. However, the equity prices of many investment and commercial banks had declined over the intermeeting period, reflecting increased concern about asset quality and the outlook for profits. The deteriorating condition of some financial guarantors and mortgage insurers contributed to worries about banks. Investors remained chary of securitized products, such as mortgage credits not guaranteed by a government-sponsored enterprise or agency. A number of financial institutions had been successful in raising new capital, but reportedly on less favorable terms than before. Participants judged that many financial institutions would need to continue to recapitalize and reduce their leverage. Some anticipated that this process could well be protracted, and that financial intermediation consequently would be impeded for some time, holding back growth well into 2009. Overall, financial market conditions, while better in many respects, appeared to remain fragile, and participants judged that potential further adverse financial market developments still posed downside risks to economic activity. Recent data pointed to more resilience in consumer spending in the second quarter than had been expected. However, most participants thought that much of the recent strength probably indicated only a more delayed slowing in consumer spending than had been expected rather than a more favorable trend. Falling wealth and real income, tightening credit conditions, rising energy prices, and sharply declining consumer sentiment were seen as likely to restrain consumer spending later this year, particularly after the effects of the fiscal stimulus waned. Lenders were exhibiting greater caution in extending credit to households, partly in response to actual and expected increases in delinquency rates on household credit. Participants reported that second mortgages, automobile loans, and home equity lines of credit were becoming harder to obtain, and some existing home equity lines were being cut, even for consumers with good credit scores. The possibilities that the decline in house prices would be more protracted than previously anticipated, that spillovers from the decline in housing wealth to consumption could be larger than expected, and that the household saving rate might rise more steeply than currently projected were seen as posing downside risks to consumption spending going forward. Participants judged that the outlook for the housing market remained bleak, with falling prices, slow sales, high inventories of unsold homes, and further declines in construction activity over coming months. Although a few participants saw tentative signs that the housing market might be bottoming out in some parts of the country, most aggregate indicators of housing activity pointed to continued weakness. Also, mortgage rates had increased, and the equity prices of housing-related firms had fallen over the intermeeting period, after having stabilized earlier in the year, suggesting renewed pessimism among investors about prospects for the housing industry. Rising foreclosures were seen as likely to continue to add to downward pressure on house prices. Business spending was expected to remain sluggish, as tight credit conditions, uncertainty about economic growth, and the rising costs of inputs--especially energy and raw materials--appeared to be making firms quite cautious and inclined to defer capital expenditures. Businesses had been able to raise a considerable volume of funds in bond markets of late, and profits and cash flow were still strong in the nonfinancial business sector. But some regional banks that had experienced substantial credit losses were expected to adopt a significantly more conservative lending posture, further limiting the availability of credit to small businesses. Although the available data indicated that spending on nonresidential construction projects had remained relatively robust in recent months, participants thought that this strength might have reflected projects initiated some time ago, when the economic outlook and credit conditions were more favorable, and they expected poor business sentiment and tighter credit to lead commercial construction to soften later this year and next year. Some anecdotal reports of recently delayed or canceled new construction projects supported this view. Regarding economic activity in various business sectors, participants reported continued overall softness in manufacturing, especially in the housing-related and motor vehicle sectors. Flooding in the Midwest had disrupted transportation and damaged corn and soybean crops. However, production in the energy and steel sectors appeared to be strengthening, and industry contacts generally reported that demand for exported goods was buoyant. Labor markets in most regions continued to weaken gradually. Most participants anticipated persistent slack in labor markets, with the unemployment rate rising further through next year, before declining slightly in 2010. The current account deficit had narrowed significantly on balance in recent quarters, and still-solid foreign growth was expected to contribute to a further narrowing of the real U.S. trade deficit in coming quarters. However, a few participants commented that this effect might fade over time, as they expected demand in foreign economies to slow. Participants were concerned about the inflationary consequences of recent increases in the prices of energy, food, and imports, and they expected headline inflation to rise in the very near term. However, core inflation had been stable of late, and participants anticipated that a leveling-out of energy prices and slack in labor and product markets would contribute to a moderation of inflation pressures over time. Reports on the ability of firms to pass cost increases on to customers were mixed, but some participants commented that the global nature of inflationary pressures could make imports more expensive and give firms greater scope to raise prices. Some participants noted that wage growth had been quite moderate, reinforcing a view that longer-term inflation expectations and labor cost pressures had remained fairly well contained. However, others commented that wages might accelerate with a lag only after inflation expectations had moved higher, and that it would be very costly to subsequently bring those expectations back down. Participants' views of the recent evidence on inflation expectations varied. Some noted that the increase was greatest for short-term survey measures of households' inflation expectations, which may be influenced disproportionately by consumers' perceptions of changes in the prices of food and gasoline; those participants judged that underlying inflation trends had not risen nearly as much and anticipated that such survey measures would reverse their recent increases as headline inflation moderated. However, others saw the signs of a rise in inflation expectations as more broad-based and were concerned that this development could signal an erosion of confidence in the Committee's commitment to price stability and, absent effective action by the Committee, could impart greater momentum to the inflation process. Participants agreed that the possibilities of greater pass-through of cost increases into prices, higher long-run inflation expectations feeding into labor costs and other prices, and further increases in energy prices all posed upside risks to inflation that had intensified since the time of the April FOMC meeting. Some participants noted that certain measures of the real federal funds rate, especially those using actual or forecasted headline inflation, were now negative, and very low by historical standards. In the view of these participants, the current stance of monetary policy was providing considerable support to aggregate demand and, if the negative real federal funds rate was maintained, it could well lead to higher trend inflation. In this view, a significant portion of the easing in monetary policy since last fall was aimed at providing insurance against the risk of an especially severe weakening in economic activity and, with downside risks having diminished somewhat, some firming in policy would be appropriate very soon, if not at this meeting. However, other participants observed that the high level of risk spreads and the restricted availability of credit suggested that overall financial conditions were not especially accommodative; indeed, borrowing costs for many households and businesses were higher than they had been last summer. In the Committee's discussion of monetary policy for the intermeeting period, members generally agreed that the risks to growth had diminished somewhat since the time of the last FOMC meeting while the upside risks to inflation had increased. Nonetheless, the risks to growth remained tilted to the downside. Conditions in some financial markets had improved, but many financial institutions continued to experience significant credit losses and balance sheet pressures, and in these circumstances credit availability was likely to remain constrained for some time. At the same time, however, the near-term outlook for inflation had deteriorated, and the risks that underlying inflation pressures could prove to be greater than anticipated appeared to have risen. Members commented that the continued strong increases in energy and other commodity prices would prompt a difficult adjustment process involving both lower growth and higher rates of inflation in the near term. Members were also concerned about the heightened potential in current circumstances for an upward drift in long-run inflation expectations. With increased upside risks to inflation and inflation expectations, members believed that the next change in the stance of policy could well be an increase in the funds rate; indeed, one member thought that policy should be firmed at this meeting. However, in the view of most members, the outlook for both economic activity and price pressures remained very uncertain, and thus the timing and magnitude of future policy actions was quite unclear. Against this backdrop, most members judged that an unchanged federal funds rate at this meeting represented an appropriate balancing of the risks to the economic outlook and was consistent, for now, with a policy path that would support an eventual decline in both inflation and unemployment. Nonetheless, members recognized that circumstances could change quickly and noted that they might need to respond promptly to incoming information about the evolution of risks. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee in the immediate future seeks conditions in reserve markets consistent with maintaining the federal funds rate at an average of around 2 percent." The vote encompassed approval of the statement below to be released at 2:15 p.m.: "The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent. Recent information indicates that overall economic activity continues to expand, partly reflecting some firming in household spending. However, labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters. The Committee expects inflation to moderate later this year and next year. However, in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high. The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time. Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability." Votes for this action: Messrs. Bernanke, Geithner, Kohn, Kroszner, and Mishkin, Ms. Pianalto, Messrs. Plosser, Stern, and Warsh. Votes against this action: Mr. Fisher. Mr. Fisher dissented because he preferred an increase in the target federal funds rate at this meeting. While the financial system was still frail and downside risks to growth remained, the risk that inflation would fail to moderate as expected by the Committee had increased substantially over the intermeeting period. Relatively strong demand for oil and other commodities abroad, as well as increased labor and other operating costs in the emerging economies, was boosting prices of globally traded goods and services. Mr. Fisher was especially concerned about behavioral changes among business operators that appeared to be accommodating inflationary pressures. In particular, firms increasingly appeared to be planning to pass through their higher input costs to final goods prices in order to protect their profit margins. Overall, Mr. Fisher viewed inflation expectations as becoming less well anchored. To help restrain inflation expectations and inflation, Mr. Fisher felt it would be appropriate for the Committee to tighten the stance of monetary policy. In a joint session of the Federal Open Market Committee and the Board of Governors, meeting participants turned to a consideration of policy issues regarding investment banks and other primary securities dealers. Participants discussed the financial activities and condition of primary dealers as well as the objectives of, procedures for, and experience to date in administering the Primary Dealer Credit Facility (PDCF) and the Term Securities Lending Facility (TSLF). (The PDCF and the TSLF had been established in March in response to unusual and exigent conditions in financial markets.) In view of the continuing significant strains in financial markets, participants also discussed the possibility of extending the PDCF and the TSLF past year-end. In addition, they reviewed progress in negotiations with staff of the Securities and Exchange Commission regarding a memorandum of understanding intended to govern arrangements for sharing information on broker-dealers and for cooperation in the supervision of primary dealers. Finally, participants exchanged views on longer-run issues regarding appropriate arrangements for supervision and regulation of investment banks and other securities dealers and for the access of such firms to central bank liquidity, as well as on possible measures to strengthen financial market functioning and thus enhance financial stability. It was agreed that the next meeting of the Committee would be held on Tuesday, August 5, 2008. The meeting adjourned at 1:15 p.m. Notation VoteBy notation vote completed on May 20, 2008, the Committee unanimously approved the minutes of the FOMC meeting held on April 29-30, 2008. _____________________________ Brian F. MadiganSecretary Return to top

2008-05-21

Minute

A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, April 29, 2008 at 2:00 p.m. and continued on Wednesday, April 30, 2008 at 9:00 a.m. PRESENT:Mr. Bernanke, ChairmanMr. Geithner, Vice ChairmanMr. FisherMr. KohnMr. KrosznerMr. MishkinMs. Pianalto Mr. PlosserMr. SternMr. Warsh Ms. Cumming, Messrs. Evans, Lacker, and Lockhart, and Ms. Yellen, Alternate Members of the Federal Open Market Committee Messrs. Bullard, Hoenig, and Rosengren, Presidents of the Federal Reserve Banks of St. Louis, Kansas City, and Boston, respectively Mr. Lyon, First Vice President, Federal Reserve Bank of Minneapolis Mr. Madigan, Secretary and EconomistMs. Danker, Deputy SecretaryMr. Skidmore, Assistant SecretaryMs. Smith, Assistant SecretaryMr. Alvarez, General CounselMr. Baxter, Deputy General CounselMr. Sheets, Economist Mr. Stockton, Economist Messrs. Connors, English, and Kamin, Ms. Mester, Messrs. Rosenblum, Slifman, Sniderman, and Wilcox, Associate Economists Mr. Dudley, Manager, System Open Market Account Ms. J. Johnson,1 Secretary, Office of the Secretary, Board of Governors Ms. Roseman,1 Director, Division of Reserve Bank Operations and Payment Systems, Board of Governors Mr. Struckmeyer, Deputy Staff Director, Office of Staff Director for Management, Board of Governors Mr. Blanchard, Assistant to the Board, Office of Board Members, Board of Governors Mr. Frierson,1 Deputy Secretary, Office of the Secretary, Board of Governors Ms. Bailey, Deputy Director, Division of Banking Supervision and Regulation, Board of Governors Mr. Clouse, Deputy Director, Division of Monetary Affairs, Board of Governors Messrs. Hammond1 and Marquardt,1 Deputy Directors, Division of Reserve Bank Operations and Payment Systems, Board of Governors Ms. Edwards,1 Associate Director, Division of Monetary Affairs, Board of Governors Ms. Shanks,1 Associate Secretary, Office of the Secretary, Board of Governors Messrs. Reifschneider and Wascher, Associate Directors, Division of Research and Statistics, Board of Governors Mr. Gagnon, Visiting Associate Director, Division of Monetary Affairs, Board of GovernorsMs. Martin,1 Associate General Counsel, Legal Division, Board of Governors Mr. Carpenter,1 Assistant Director, Division of Monetary Affairs, Board of Governors Mr. Dale, Senior Adviser, Division of Monetary Affairs, Board of Governors Mr. Oliner, Senior Adviser, Division of Research and Statistics, Board of Governors Ms. Allison,1 Senior Counsel, Legal Division, Board of Governors Mr. Gross,1 Special Assistant to the Board, Office of Board Members, Board of Governors Ms. Weinbach, Adviser, Division of Monetary Affairs, Board of Governors Mr. Small, Project Manager, Division of Monetary Affairs, Board of Governors Mr. Luecke, Section Chief, Division of Monetary Affairs, Board of Governors Ms. Beattie,1 Assistant to the Secretary, Office of the Secretary, Board of Governors Ms. Low, Open Market Secretariat Specialist, Division of Monetary Affairs, Board of Governors Ms. Hughes,1 Staff Assistant, Office of the Secretary, Board of Governors Mr. Fuhrer, Executive Vice President, Federal Reserve Bank of Boston Messrs. Hilton, McAndrews,1 Rasche, Rudebusch, Steindel, Sullivan, and Weinberg, Senior Vice Presidents, Federal Reserve Banks of New York, New York, St. Louis, San Francisco, New York, Chicago, and Richmond, respectively Messrs. Clark and Meyer,1 Vice Presidents, Federal Reserve Banks of Kansas City and Philadelphia, respectively Mr. Weber, Senior Research Officer, Federal Reserve Bank of Minneapolis Mr. Roberds, Policy Adviser, Federal Reserve Bank of Atlanta 1. Attended portion of the meeting relating to the implications of interest on reserves for monetary policy implementation. Return to text The Manager of the System Open Market Account reported on recent developments in foreign exchange markets. There were no open market operations in foreign currencies for the System's account in the period since the previous meeting. The Manager also reported on developments in domestic financial markets and on System open market operations in government securities and federal agency obligations during the period since the previous meeting. By unanimous vote, the Committee ratified these transactions. By unanimous vote, the Committee extended for one year beginning in mid-December 2008 the reciprocal currency ("swap") arrangements with the Bank of Canada and the Banco de Mexico. The arrangement with the Bank of Canada is in the amount of $2 billion equivalent and that with the Banco de Mexico is in the amount of $3 billion equivalent. Both arrangements are associated with the Federal Reserve's participation in the North American Framework Agreement of 1994. The vote to renew the System's participation in the swap arrangements maturing in December was taken at this meeting because of the provision that each party must provide six months' prior notice of an intention to terminate its participation. In view of continuing strains in interbank and other financial markets, the Committee took up proposals to expand several of the liquidity arrangements that had been put in place in recent months. Chairman Bernanke indicated his intention to increase the overall size of the Term Auction Facility under delegated authority from the Board of Governors, and he proposed increases in the swap lines with the European Central Bank and Swiss National Bank to help address pressures in short-term dollar funding markets. Meeting participants discussed the possible costs and benefits of a proposed broadening of eligible collateral for the Term Securities Lending Facility (TSLF). On balance, the Committee agreed that expanding the range of eligible collateral for the TSLF might help to increase the effectiveness of the facility and so further promote the orderly functioning of financial markets. By unanimous votes, the Committee approved the following three resolutions: The Federal Open Market Committee directs the Federal Reserve Bank of New York to increase the amount available from the System Open Market Account under the existing reciprocal currency arrangement ("swap" arrangement) with the European Central Bank to an amount not to exceed $50 billion. Within that aggregate limit, draws of up to $25 billion are hereby authorized. The current swap arrangement shall be extended until January 30, 2009, unless further extended by the Federal Open Market Committee. The Federal Open Market Committee directs the Federal Reserve Bank of New York to increase the amount available from the System Open Market Account under the existing reciprocal currency arrangement ("swap" arrangement) with the Swiss National Bank to an amount not to exceed $12 billion. Within that aggregate limit, draws of up to $6 billion are hereby authorized. The current swap arrangement shall be extended until January 30, 2009, unless further extended by the Federal Open Market Committee. In connection with the Term Securities Lending Facility, the Federal Reserve Bank of New York may accept pledges of AAA-rated asset-backed securities (in addition to the other assets previously authorized by the FOMC) as collateral against loans of U.S. Government securities. The information reviewed at the April meeting, which included the advance data on the national income and product accounts for the first quarter, indicated that economic growth had remained weak so far this year. Labor market conditions had deteriorated further, and manufacturing activity was soft. Housing activity had continued its sharp descent, and business spending on both structures and equipment had turned down. Consumer spending had grown very slowly, and household sentiment had tumbled further. Core consumer price inflation had slowed in recent months, but overall inflation remained elevated. Labor demand continued to weaken in March. Private payroll employment fell in March at a rate similar to that in January and February. The reduction in jobs was again widespread, with losses registered at firms in the construction, manufacturing, and professional and business services sectors. Employment at firms in the nonbusiness services sector, which includes health care, continued to rise. Aggregate hours of private production or nonsupervisory workers moved up in March but posted a decline for the first quarter as a whole after having contracted slightly in the first two months of the year. The unemployment rate rose to 5.1 percent in March, significantly above its level a year ago, and the labor force participation rate was little changed. Although industrial production rose in March, production over the first quarter as a whole was soft, having declined, on average, in January and February. Gains in manufacturing output of consumer and high-tech goods in March were partially offset by a sharp drop in production of motor vehicles and parts and by ongoing weakness in the output of construction-related industries. The output of utilities rebounded in March following a weather-related drop in February, and mining output moved up after exhibiting weakness earlier in the year. The factory utilization rate edged up in March but stayed well below its recent high in the third quarter of 2007. Real consumer spending expanded slowly in the first quarter. Real outlays on durable goods, including automobiles, were estimated to have declined in March, but expenditures on nondurable goods were thought to have edged up, boosted by a sizable increase in real outlays for gasoline. For the quarter as a whole, however, real expenditures on both durable and nondurable goods declined. Real disposable personal income also grew slowly in the first quarter, restrained by rapidly rising prices for energy and food. The ratio of household wealth to disposable income appeared to have moved down again in the first quarter, damped by the appreciable net decline in broad equity prices over that period and by further reductions in house prices. Measures of consumer sentiment fell sharply in March and April; the April reading of consumer sentiment published in the Reuters/University of Michigan Survey of Consumers was near the low levels posted in the early 1990s. Residential construction continued its rapid contraction in the first quarter. Single-family housing starts maintained their steep downward trajectory in March, and starts of multifamily homes declined to the lower portion of their recent range. Sales of new single-family homes declined in February to a very low rate and dropped further in March. Even though production cuts by homebuilders helped to reduce the level of inventories at the end of February, the slow pace of sales caused the ratio of unsold new homes to sales to increase further. Sales of existing homes remained weak, on average, in February and March, and the index of pending sales agreements in February suggested continued sluggish activity in coming months. The recent softening in residential housing demand was consistent with reports of tighter credit conditions for both prime and nonprime borrowers. In the business sector, real spending on equipment and software contracted slightly in the first quarter after having posted a small increase in the fourth quarter. Following declines in both shipments and orders of nondefense capital goods excluding aircraft in January and February, shipments increased in March, but orders were flat. The deteriorating outlook for sales, reduced credit availability, and downbeat readings on business sentiment all pointed to further weakness in capital spending in the near term. Real outlays for nonresidential structures also were estimated to have declined in the first quarter. Indicators suggested that the demand for commercial properties had fallen off substantially from record levels last year, and commercial property prices appeared to be decelerating. Reduced credit availability and less-favorable lending terms had apparently weighed on activity in this sector. Real investment in nonfarm inventories excluding motor vehicles was estimated to have bounced back to a moderate annual rate in the first quarter, but motor vehicle inventories continued to fall. Some of the drop in motor vehicle stocks was a result of the disruption to production from a labor dispute. The ratio of book-value inventories to sales in the manufacturing and trade sector (excluding motor vehicles) moved up a little, on average, in January and February. Still, outside of categories tied to housing and construction, firms did not appear to be burdened with excess stocks. The U.S. international trade deficit widened in February. Imports rose sharply, more than offsetting continued robust growth of exports. Most major categories of non-oil imports increased in February, and imports of natural gas, automobiles, and consumer goods surged. Imports of services continued to rise at a robust pace. By contrast, oil imports moved down. Increases in exports in February were concentrated in agricultural goods, automobiles, and industrial supplies, particularly fuels. Exports of capital goods declined for the second consecutive month, with weakness evident across a wide range of products. Real economic growth in the major advanced foreign economies was estimated to have slowed further in the first quarter and consumer and business sentiment was generally down. In Japan, business sentiment fell significantly and indicators of investment remained weak. In the euro area, growth was estimated to have remained subdued in the first quarter, with Germany and France faring better than Italy and Spain. Growth in the United Kingdom slowed in the first quarter, as credit conditions tightened. Available data for Canada indicated a continued substantial drag from exports in the first quarter, although domestic demand appeared relatively robust. In emerging market economies, economic growth slowed some in the fourth quarter and was estimated to have held about steady in the first quarter. In emerging Asia, real economic growth was estimated to have picked up in the first quarter from a robust pace in the fourth quarter, led by brisk expansions in China and Singapore. Growth in other emerging Asian economies generally remained subdued. The pace of expansion in Latin America likely declined some in the first quarter, largely because the Mexican economy slowed in the wake of softer growth in the United States. Headline inflation in the United States was elevated in March. Although the increase in food prices slowed in March relative to earlier in the year, energy prices rose sharply. Excluding these categories, core inflation rose at a relatively subdued rate again in March. The core personal consumption expenditures (PCE) price index increased at a somewhat more moderate rate in the first quarter than in the fourth quarter of 2007. Survey measures of households' expectations for year-ahead inflation rose further in early April, but survey measures of longer-term inflation expectations moved relatively little. Average hourly earnings increased in March at a somewhat slower pace than in January and February. This wage measure rose significantly less over the 12 months that ended in March than in the previous 12 months. The employment cost index for hourly compensation continued to rise at a moderate rate in the first quarter. At its March 18 meeting, the Federal Open Market Committee (FOMC) lowered its target for the federal funds rate 75 basis points, to 2-1/4 percent. In addition, the Board of Governors approved a decrease of 75 basis points in the discount rate, to 2-1/2 percent. The Committee's statement noted that recent information indicated that the outlook for economic activity had weakened further; growth in consumer spending had slowed, and labor markets had softened. It also indicated that financial markets remained under considerable stress, and that the tightening of credit conditions and the deepening of the housing contraction were likely to weigh on economic growth over the next few quarters. Inflation had been elevated, and some indicators of inflation expectations had risen, but the Committee expected inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, the Committee noted that uncertainty about the inflation outlook had increased, and that it would be necessary to continue to monitor inflation developments carefully. The Committee said that its action, combined with those taken earlier, including measures to foster market liquidity, should help to promote moderate growth over time and to mitigate the risks to economic activity. The Committee noted, however, that downside risks to growth remained, and indicated that it would act in a timely manner as needed to promote sustainable economic growth and price stability. Conditions in U.S. financial markets improved somewhat, on balance, over the intermeeting period, but strains in some short-term funding markets increased. Pressures on bank balance sheets and capital positions appeared to mount further, reflecting additional losses on asset-backed securities and on business and household loans. Against this backdrop, term spreads in interbank funding markets and spreads on commercial paper issued by financial institutions widened significantly. Financial institutions continued to tap the Federal Reserve's credit programs. Primary credit borrowing picked up noticeably after March 16, when the Federal Reserve reduced the spread between the primary credit rate and the target federal funds rate to 25 basis points. Demand for funds from the Term Auction Facility stayed high over the period. In addition, the Primary Dealer Credit Facility drew substantial demand through late March, although the amount outstanding subsequently declined somewhat. Early in the period, historically low interest rates on Treasury bills and on general-collateral Treasury repurchase agreements indicated a considerable demand for safe-haven assets. However, Federal Reserve actions that increased the availability of Treasury securities to the public apparently helped to improve conditions in those markets. In five weekly auctions beginning on March 27, the Term Securities Lending Facility provided a substantial volume of Treasury securities in exchange for less-liquid assets. Yields on short-term Treasury securities and Treasury repurchase agreements moved higher, on balance, following these auctions; nonetheless, "haircuts" applied by lenders on non-Treasury collateral remained elevated, and in some cases increased somewhat, toward the end of the period. In longer-term credit markets, yields on investment-grade corporate bonds rose, but their spreads relative to Treasury securities decreased a bit from recent multiyear highs. In contrast, yields on speculative-grade issues dropped, and their spreads relative to Treasury yields narrowed significantly. Gross bond issuance by nonfinancial firms was robust in March and the first half of April and included a small amount of issuance by speculative-grade firms. Supported by increases in business and residential real estate loans, commercial bank credit expanded briskly in March despite the report of tighter lending conditions in the Senior Loan Officer Opinion Survey on Bank Lending Practices conducted in April. Part of the strength in commercial and industrial loans was apparently due to increased utilization of existing credit lines, the pricing of which reflects changes in lending policies only with a lag. Some banks surveyed in April reported that they had started to take actions to limit their exposure to home equity lines of credit, draws on which had grown rapidly in recent months. After having tightened considerably in March, conditions in the conforming segment of the residential mortgage market recovered somewhat. Spreads of rates on conforming residential mortgages over those on comparable-maturity Treasury securities decreased, and credit default swap premiums for the government-sponsored enterprises declined substantially. Broad stock price indexes increased markedly over the intermeeting period, mainly in response to earnings reports and announcements of recapitalizations from major financial institutions that evidently lessened investors' concerns about the possibility of severe difficulties materializing at those firms. Conditions in the money markets of major foreign economies remained strained, particularly in the United Kingdom and the euro area. Term interbank funding spreads rose in these areas, despite steps taken by their central banks to help ease liquidity pressures. Yields on sovereign debt in the advanced foreign economies moved up in a range that was about in line with the increases in comparable Treasury yields in the United States. The trade-weighted foreign exchange value of the dollar against major currencies rose. M2 expanded briskly again in March, as households continued to seek the relative liquidity and safety of liquid deposits and retail money market mutual funds. The increases in these components were also supported by declines in opportunity costs stemming from monetary policy easing. Over the intermeeting period, the expected path of monetary policy over the next year as measured by money market futures rates moved up significantly on net, apparently because economic data releases and announcements by large financial firms imparted greater confidence among investors about the prospects for the economy's performance in coming quarters. Futures rates also moved up in response to both the Committee's decision to lower the target for the federal funds rate by 75 basis points at the March 18 meeting, which was a somewhat smaller reduction than market participants had expected, and the Committee's accompanying statement, which reportedly conveyed more concern about inflation than had been anticipated. The subsequent release of the minutes of the March FOMC meeting elicited limited reaction. Consistent with the higher expected path for policy and easing of safe-haven demands, yields on nominal Treasury coupon securities rose substantially over the period, and the Treasury yield curve flattened. Measures of inflation compensation for the next five years derived from yields on inflation-indexed Treasury securities were quite volatile around the time of the March FOMC meeting and on balance increased somewhat over the intermeeting period, although they remained in the lower portion of their range over the past several months. Measures of longer-term inflation compensation declined, returning to around the middle of their recent elevated range. In the forecast prepared for this meeting, the staff made little change to its projection for the growth of real gross domestic product (GDP) in 2008 and 2009. The available indicators of recent economic activity had come in close to the staff's expectations and had continued to suggest that a substantial softening in economic activity was under way. The staff projection pointed to a contraction of real GDP in the first half of 2008 followed by a modest rise in the second half of this year, aided in part by the fiscal stimulus package. The forecast showed real GDP expanding at a rate somewhat above its potential in 2009, reflecting the impetus from cumulative monetary policy easing, continued strength in net exports, a gradual lessening in financial market strains, and the waning drag from past increases in energy prices. Despite this pickup in the pace of activity, the trajectory of resource utilization anticipated through 2009 implied noticeable slack. The projection for core PCE price inflation in 2008 as a whole was unchanged; it was reduced a bit over the first half of the year to reflect the somewhat lower-than-expected readings of recent core PCE inflation and raised a bit over the second half of the year to incorporate the spillover from larger-than-anticipated increases in prices of crude oil and non-oil imports since the previous FOMC meeting. The forecast of headline PCE inflation in 2008 was revised up in light of the further run-up in energy prices and somewhat higher food price inflation; headline PCE inflation was expected to exceed core PCE price inflation by a considerable margin this year. In view of the projected slack in resource utilization in 2009 and flattening out of oil and other commodity prices, both core and headline PCE price inflation were projected to drop back from their 2008 levels, in line with the staff's previous forecasts. In conjunction with the FOMC meeting in April, all meeting participants (Federal Reserve Board members and Reserve Bank presidents) provided annual projections for economic growth, the unemployment rate, and inflation for the period 2008 through 2010. The projections are described in the Summary of Economic Projections, which is attached as an addendum to these minutes. In their discussion of the economic situation and outlook, FOMC participants noted that the data received since the March FOMC meeting, while pointing to continued weakness in economic activity, had been broadly consistent with their expectations. Conditions across a number of financial markets were judged to have improved over the intermeeting period, but financial markets remained fragile and strains in some markets had intensified. Although participants anticipated that further improvement in market conditions would occur only slowly and that some backsliding was possible, the generally better state of financial markets had caused participants to mark down the odds that economic activity could be severely disrupted by a further substantial deterioration in the financial environment. Economic activity was anticipated to be weakest over the next few months, with many participants judging that real GDP was likely to contract slightly in the first half of 2008. GDP growth was expected to begin to recover in the second half of this year, supported by accommodative monetary policy and fiscal stimulus, and to increase further in 2009 and 2010. Views varied about the likely pace and vigor of the recovery through 2009, although all participants projected GDP growth to be at or above trend in 2010. Incoming information on the inflation outlook since the March FOMC meeting had been mixed. Readings on core inflation had improved somewhat, but some of this improvement was thought likely to reflect transitory factors, and energy and other commodity prices had increased further since March. Total PCE inflation was projected to moderate from its current elevated level to between 1-1/2 percent and 2 percent in 2010, although participants stressed that this expected moderation was dependent on food and energy prices flattening out and critically on inflation expectations remaining reasonably well anchored. Conditions across a number of financial markets had improved since the previous FOMC meeting. Equity prices and yields on Treasury securities had increased, volatility in both equity and debt markets had ebbed somewhat, and a range of credit risk premiums had moved down. Participants noted that the better tone of financial markets had been helped by the apparent willingness and ability of financial institutions to raise new capital. Investors' confidence had probably also been buoyed by corporate earnings reports for the first quarter, which suggested that profit growth outside of the financial sector remained solid, and also by the resolution of the difficulties of a major broker-dealer in mid-March. Moreover, the various liquidity facilities introduced by the Federal Reserve in recent months were thought to have bolstered market liquidity and aided a return to more orderly market functioning. But participants emphasized that financial markets remained under considerable stress, noted that the functioning of many markets remained impaired, and expressed concern that some of the recent recovery in markets could prove fragile. Strains in short-term funding markets had intensified over the intermeeting period, in part reflecting continuing pressures on the liquidity positions of financial institutions. Despite a narrowing of spreads on corporate bonds, credit conditions were seen as remaining tight. The Senior Loan Officer Opinion Survey on Bank Lending Practices conducted in April indicated that banks had tightened lending standards and pricing terms on loans to both businesses and households. Participants stressed that it could take some time for the financial system to return to a more normal footing, and a number of participants were of the view that financial headwinds would probably continue to restrain economic activity through much of next year. Even so, the likelihood that the functioning of the financial system would deteriorate substantially further with significant adverse implications for the economic outlook was judged by participants to have receded somewhat since the March FOMC meeting. The housing market had continued to weaken since the previous meeting, and participants saw little indication of a bottoming out in either housing activity or prices. Housing starts and the demand for new homes had declined further, house prices in many parts of the country were falling faster than they had towards the end of 2007, and inventories of unsold homes remained quite elevated. A small number of participants reported tentative signs that housing activity in a few areas of the country might be beginning to pick up, and a narrowing of credit risk spreads on AAA indexes of sub-prime mortgages in recent weeks was also noted. Nonetheless, the outlook for the housing market remained bleak, with housing demand likely to be affected by restrictive conditions in mortgage markets, fears that house prices would fall further, and weakening labor markets. The possibility that house prices could decline by more than anticipated, and that the effects of such a decline could be amplified through their impact on financial institutions and financial markets, remained a key source of downside risk to participants' projections for economic growth. Growth in consumer spending appeared to have slowed to a crawl in recent months and consumer sentiment had fallen sharply. The pressure on households' real incomes from higher energy prices and the erosion of wealth resulting from continuing declines in house prices likely contributed to the deceleration in consumer outlays. Reports from contacts in the banking and financial services sectors indicated that the availability of both consumer credit and home equity lines had tightened considerably further in recent months and that delinquency rates on household credit had continued to drift upwards. Consumer sentiment and spending had also been held down by the softening in labor markets--nonfarm payroll employment had fallen for the third consecutive month in March and the unemployment rate had moved up. The restraint on spending emanating from weakness in labor markets was expected to increase over coming quarters, with participants projecting the unemployment rate to pick up further this year and to remain elevated in 2009. Consumption spending was likely to be supported in the near term by the fiscal stimulus package, which was expected to boost spending temporarily in the middle of this year. Some participants suggested that the weak economic environment could increase the propensity of households to use their tax rebates to pay down existing debt and so might diminish the impact of the package. However, it was also noted that the tightening in credit availability might mean a significant number of households may be credit constrained and this might increase the proportion of the rebates that is spent. The timing and magnitude of the impact of the stimulus package on GDP was also seen as depending on the extent to which the boost to consumption spending is absorbed by a temporary run-down in firms' inventories or by an increase in imports rather than by an expansion in domestic output. The outlook for business spending remained decidedly downbeat. Indicators of business sentiment were low, and reports from business contacts suggested that firms were scaling back their capital spending plans. Several participants reported that uncertainty about the economic outlook was leading firms to defer spending projects until prospects for economic activity became clearer. The tightening in the supply of business credit was also seen as holding back investment, with some firms apparently reluctant to reduce their liquidity positions in the current environment. Spending on nonresidential construction projects continued to slow, although the extent of that slowing varied across the country. A few participants reported that the commercial real estate market in some areas remained relatively firm, supported by low vacancy rates. The strength of U.S. exports remained a notable bright spot. Growth in exports, which had been supported by solid advances in foreign economies and by declines in the foreign exchange value of the dollar, had partially insulated the output and profits of U.S. companies, especially those in the manufacturing sector, from the effects of weakening domestic demand. Several participants voiced concern, however, that the pace of activity in the rest of the world could slow in coming quarters, suggesting that the impetus provided from net exports might well diminish. The information received on the inflation outlook since the March FOMC meeting had been mixed. Recent readings on core inflation had improved somewhat, although participants noted that some of that improvement probably reflected transitory factors. Moreover, the increase in crude oil prices to record levels, together with rapid increases in food and import prices in recent months, was likely to put upward pressure on inflation over the next few quarters. Prices embedded in futures contracts continued to point to a leveling-off of energy and commodity prices. Although these futures contracts probably remained the best basis for projecting movements in commodity prices, participants emphasized the considerable uncertainty attending the likely path of commodity prices and cautioned that commodity prices in recent years had often advanced more quickly than had been implied by futures contracts. Several participants reported that business contacts had expressed growing concerns about the increase in their input costs and that there were signs that an increasing number of firms were seeking to pass on these higher costs to their customers in the form of higher prices. Other participants noted, however, that the extent of the pass-through of higher energy and food prices to core retail prices appeared relatively limited to date, and that profit margins in the nonfinancial sector remained reasonably high, suggesting that there was some scope for firms to absorb cost increases without raising prices. Available data and anecdotal reports indicated that gains in labor compensation remained moderate, and some participants suggested that wage growth was unlikely to pick up sharply in coming quarters if, as anticipated, labor markets remained relatively soft. However, several participants were of the view that wage inflation tended to lag increases in prices and so may not provide a useful guide to emerging price pressures. On balance, participants expected the recent increases in oil and food prices to continue to boost overall consumer price inflation in the near term; thereafter, total inflation was projected to moderate, with all participants expecting total PCE inflation of between 1-1/2 percent and 2 percent by 2010. Participants stressed that the expected moderation in inflation was dependent on the continued stability of inflation expectations. A number of participants voiced concern that long-term inflation expectations could drift upwards if headline inflation remained elevated for a protracted period or if the recent substantial policy easing was misinterpreted by the public as suggesting that Committee members had a greater tolerance for inflation than previously thought. The possibility that inflation expectations could increase was viewed as a key upside risk to the inflation outlook. However, participants emphasized that appropriate monetary policy, combined with effective communication of the Committee's commitment to price stability, would mitigate this risk. Participants stressed the difficulty of gauging the appropriate stance of policy in current circumstances. Some participants noted that the level of the federal funds target, especially when compared with the current rate of inflation, was relatively low by historical standards. Even taking account of current financial headwinds, such a low rate could suggest that policy was reasonably accommodative. However, other participants observed that the pronounced strains in banking and financial markets imparted much greater uncertainty to such assessments and meant that measures of the stance of policy based on the real federal funds rate were not likely to provide a reliable guide in the current environment. Several participants expressed the view that the easing in monetary policy since last fall had not as yet led to a loosening in overall financial conditions, but rather had prevented financial conditions from tightening as much as they otherwise would have in response to escalating strains in financial markets. This view suggested that the stimulus from past monetary policy easing would be felt mainly as conditions in financial markets improved. In the Committee's discussion of monetary policy for the intermeeeting period, most members judged that policy should be eased by 25 basis points at this meeting. Although prospects for economic activity had not deteriorated significantly since the March meeting, the outlook for growth and employment remained weak and slack in resource utilization was likely to increase. An additional easing in policy would help to foster moderate growth over time without impeding a moderation in inflation. Moreover, although the likelihood that economic activity would be severely disrupted by a sharp deterioration in financial markets had apparently receded, most members thought that the risks to economic growth were still skewed to the downside. A reduction in interest rates would help to mitigate those risks. However, most members viewed the decision to reduce interest rates at this meeting as a close call. The substantial easing of monetary policy since last September, the ongoing steps taken by the Federal Reserve to provide liquidity and support market functioning, and the imminent fiscal stimulus would help to support economic activity. Moreover, although downside risks to growth remained, members were also concerned about the upside risks to the inflation outlook, given the continued increases in oil and commodity prices and the fact that some indicators suggested that inflation expectations had risen in recent months. Nonetheless, most members agreed that a further, modest easing in the stance of policy was appropriate to balance better the risks to achieving the Committee's dual objectives of maximum employment and price stability over the medium run. The Committee agreed that that the statement to be released after the meeting should take note of the substantial policy easing to date and the ongoing measures to foster market liquidity. In light of these significant policy actions, the risks to growth were now thought to be more closely balanced by the risks to inflation. Accordingly, the Committee felt that it was no longer appropriate for the statement to emphasize the downside risks to growth. Given these circumstances, future policy adjustments would depend on the extent to which economic and financial developments affected the medium-term outlook for growth and inflation. In that regard, several members noted that it was unlikely to be appropriate to ease policy in response to information suggesting that the economy was slowing further or even contracting slightly in the near term, unless economic and financial developments indicated a significant weakening of the economic outlook. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee in the immediate future seeks conditions in reserve markets consistent with reducing the federal funds rate to an average of around 2 percent." The vote encompassed approval of the statement below to be released at 2:15 p.m.: "The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 2 percent. Recent information indicates that economic activity remains weak. Household and business spending has been subdued and labor markets have softened further. Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters. Although readings on core inflation have improved somewhat, energy and other commodity prices have increased, and some indicators of inflation expectations have risen in recent months. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook remains high. It will be necessary to continue to monitor inflation developments carefully. The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability. Votes for this action: Messrs. Bernanke, Geithner, Kohn, Kroszner, and Mishkin, Ms. Pianalto, Messrs. Stern and Warsh. Votes against this action: Messrs. Fisher and Plosser. Messrs. Fisher and Plosser dissented because they preferred no change in the target federal funds rate at this meeting. Although the economy had been weak, it had evolved roughly as expected since the previous meeting. Stresses in financial markets also had continued, but the Federal Reserve's liquidity facilities were helpful in that regard and the more worrisome development in their view was the outlook for inflation. Rising prices for food, energy, and other commodities; signs of higher inflation expectations; and a negative real federal funds rate raised substantial concerns about the prospects for inflation. Mr. Plosser cited the recent rapid growth of monetary aggregates as additional evidence that the economy had ample liquidity after the aggressive easing of policy to date. Mr. Fisher was concerned that an adverse feedback loop was developing by which lowering the funds rate had been pushing down the exchange value of the dollar, contributing to higher commodity and import prices, cutting real spending by businesses and households, and therefore ultimately impairing economic activity. To help prevent inflation expectations from becoming unhinged, both Messrs. Fisher and Plosser felt the Committee should put additional emphasis on its price stability goal at this point, and they believed that another reduction in the funds rate at this meeting could prove costly over the longer run. In a joint session of the Federal Open Market Committee and the Board of Governors, meeting participants turned to a discussion of the implications of the payment of interest on reserves for monetary policy implementation. Following passage of the Financial Services Regulatory Relief Act of 2006, which will permit the Federal Reserve to reduce reserve requirements and to pay interest on reserves beginning in 2011, the staff had undertaken work to explore and evaluate alternative approaches to monetary policy implementation using these new authorities. After a staff presentation summarizing the work to date, policymakers discussed the potential advantages and disadvantages of several of the alternative approaches. Considerations included reducing the burden and complexity associated with the current system of reserve requirements and ensuring that the Committee's interest rate targets could be reliably achieved. Participants noted that frameworks for monetary policy implementation employed in other countries span a wide range and that the experiences of these countries provided useful information for the Federal Reserve's consideration of alternative approaches. They agreed that further study was required to narrow the range of options under consideration and that it would be important to consult closely with depository institutions and others in the design of a new system. It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, June 24-25, 2008.The meeting adjourned at 1:00 p.m. Notation VotesBy notation vote completed on March 20, 2008, the Committee unanimously approved a resolution that added non-agency AAA-rated commercial-mortgage-backed securities to the list of collateral acceptable in connection with the Term Securities Lending Facility. By notation vote completed on April 7, 2008, the Committee unanimously approved the minutes of the FOMC meeting held on March 18, 2008. _____________________________ Brian F. MadiganSecretary Return to top

2008-04-30

Statement

The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 2 percent. Recent information indicates that economic activity remains weak. Household and business spending has been subdued and labor markets have softened further. Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters. Although readings on core inflation have improved somewhat, energy and other commodity prices have increased, and some indicators of inflation expectations have risen in recent months. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook remains high. It will be necessary to continue to monitor inflation developments carefully. The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability. 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; Gary H. Stern; and Kevin M. Warsh. Voting against were Richard W. Fisher and Charles I. Plosser, 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 25-basis-point decrease in the discount rate to 2-1/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Cleveland, Atlanta, and San Francisco.

2008-04-08

Minute

A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, March 18, 2008 at 8:30 a.m. Present:Mr. Bernanke, ChairmanMr. Geithner, Vice ChairmanMr. FisherMr. KohnMr. KrosznerMr. MishkinMs. Pianalto Mr. PlosserMr. SternMr. Warsh Messrs. Evans, Lacker, and Lockhart, and Ms. Yellen, Alternate Members of the Federal Open Market Committee Messrs. Hoenig and Rosengren, Presidents of the Federal Reserve Banks of Kansas City and Boston, respectively Mr. Sapenaro, First Vice President, Federal Reserve Bank of St. Louis Mr. Madigan, Secretary and EconomistMs. Danker, Deputy SecretaryMr. Skidmore, Assistant SecretaryMs. Smith, Assistant SecretaryMr. Alvarez, General CounselMr. Ashton, Assistant General CounselMr. Sheets, Economist Mr. Stockton, Economist Messrs. Connors, English, and Kamin, Ms. Mester, Messrs. Rolnick, Rosenblum, Slifman, Sniderman, and Wilcox, Associate Economists Mr. Dudley, Manager, System Open Market Account Mr. Struckmeyer, Deputy Staff Director, Office of Staff Director for Management, Board of Governors Mr. Parkinson, Deputy Director, Division of Research and Statistics, Board of Governors Ms. Bailey, Deputy Director, Division of Banking Supervision and Regulation, Board of Governors Mr. Clouse, Deputy Director, Division of Monetary Affairs, Board of Governors Ms. Liang and Messrs. Reifschneider and Wascher, Associate Directors, Division of Research and Statistics, Board of Governors Mr. Gagnon, Visiting Associate Director, Division of Monetary Affairs, Board of Governors Mr. Blanchard, Assistant to the Board, Office of Board Members, Board of Governors Mr. Carpenter, Assistant Director, Division of Monetary Affairs, Board of Governors Mr. Small, Project Manager, Division of Monetary Affairs, Board of Governors Mr. Luecke, Section Chief, Division of Monetary Affairs, Board of Governors Ms. Low, Open Market Secretariat Specialist, Division of Monetary Affairs, Board of Governors Mr. Judd, Executive Vice President, Federal Reserve Bank of San Francisco Messrs. Altig, Rasche, Sellon, and Sullivan, Senior Vice Presidents, Federal Reserve Banks of Atlanta, St. Louis, Kansas City, and Chicago, respectively Mr. Olivei, Vice President, Federal Reserve Bank of Boston Mr. Pesenti, Assistant Vice President, Federal Reserve Bank of New York Mr. Hetzel, Senior Economist, Federal Reserve Bank of Richmond The Manager of the System Open Market Account reported on recent developments in foreign exchange markets. There were no open market operations in foreign currencies for the System's account in the period since the previous meeting. The Manager also reported on developments in domestic financial markets and on System open market operations in government securities and federal agency obligations during the period since the previous meeting. By unanimous vote, the Committee ratified these transactions. The information reviewed at the March meeting indicated that economic activity had continued to decelerate in recent months. The contraction in homebuilding intensified, consumer spending appeared to be weakening, and survey measures of both consumer and business sentiment were at depressed levels. Industrial production fell in February, and private payroll employment posted a third consecutive monthly decline. After having increased in recent months through January, both headline and core inflation as measured by the consumer price index (CPI) dropped noticeably in February. In early March, however, prices of oil and other commodities rose sharply. Labor demand softened markedly in recent months. The decline in private payroll employment that began last December steepened through February. Although employment by firms in the nonbusiness services sector and in state and local governments continued to rise, declines elsewhere were widespread. Losses were greatest in the manufacturing, construction, and retail trade sectors. Aggregate hours of private production or nonsupervisory workers fell slightly in the first two months of the year. The unemployment rate edged down to 4.8 percent in February, but was still up from the 4.5 percent rate of a year earlier. The labor force participation rate declined in February. Industrial production declined in February after edging up slightly in the previous two months. The output of utilities dropped back after a weather-related surge in January, while mining output fell somewhat in the first two months of the year on average. Manufacturing production edged down after having flattened out in January. The motor vehicle and construction-related industries continued to hold down overall manufacturing output even as high-tech production posted moderate increases. The factory utilization rate edged down in February to a level noticeably below its recent high in the third quarter of 2007. Real consumer spending appeared to have stalled in recent months. Real outlays for nondurable and durable consumer goods, including automobiles, were estimated to have declined, on average, in January and February. Real disposable personal income was unchanged in the fourth quarter, held down by higher food and energy prices, and moved up only slightly in January. Further declines in house prices led to a noticeable decrease in the ratio of household wealth to disposable income in the fourth quarter. The downturn in equity prices since December further reduced household wealth in the first quarter. Readings on consumer sentiment dropped sharply in February from already low levels, and the Reuters/University of Michigan survey remained at a depressed level in early March. The contraction in residential construction continued into early 2008. Single-family housing starts fell in both January and February. After having dropped especially sharply in December, multifamily housing starts rebounded somewhat in the first two months of the year. New home sales declined again in January, thereby pushing inventories of unsold homes to even higher levels relative to sales. Sales of existing homes held roughly steady in January, and the index of pending sales agreements in that month was consistent with flat sales in February and March. Overall, demand for housing continued to be restrained by tight financing conditions for jumbo and nonprime mortgages. Real spending on equipment and software rose at a sluggish rate in the fourth quarter. In January, orders and shipments of nondefense capital goods excluding aircraft were above their fourth-quarter levels. However, the overall outlook for capital spending in the first quarter was weak in light of the deterioration in surveys of business conditions and attitudes and the worsening situation in markets for business finance. On the heels of robust gains during most of last year, nominal spending on nonresidential structures decelerated in December and posted an outright decline in January. Although spending in this sector is often volatile, the recent deceleration was consistent with mounting indications of slowing demand for nonresidential buildings and tightening credit conditions. Real investment in nonfarm inventories excluding motor vehicles remained at a steady pace in the fourth quarter of 2007, but motor vehicle inventories fell sharply. After declining in November, the ratio of manufacturing and trade book-value inventories (excluding motor vehicles) to sales ticked up in December and held steady in January, but this ratio remained well below its average value in 2007. The U.S. international trade deficit narrowed substantially in December and was about unchanged in January. Exports rose sharply in both months, while imports dipped in December before recovering in January. Increases in exports were broadly based except for automotive exports, which dropped sharply in December and remained low in January. Imports of services were up moderately. Oil imports soared, reflecting increases in both prices and volumes. Most other categories of imports dropped in December and January on net, with especially large declines in imports of automotive and consumer goods. In the major advanced foreign economies, the rate of growth of real gross domestic product (GDP) generally declined in the fourth quarter. The source of the slowdown varied substantially across economies. In the euro area and in the United Kingdom, output was restrained by a softening in domestic demand. In contrast, Canadian domestic demand continued to increase at a very strong pace, but because of an offsetting steep decline in net exports, real GDP rose only modestly. Japan was the exception among the advanced foreign economies to the pattern of slower growth; real GDP there strengthened in the fourth quarter with higher domestic spending and continued strength in exports. Japanese exports to the United States, however, declined. Available first-quarter economic indicators for the advanced foreign economies were mixed, but, on balance, they pointed to slowing growth. Real activity also appeared to have slowed a bit in emerging markets, though it continued to advance at a fairly strong rate. In emerging Asia, the pace of real GDP growth picked up in the fourth quarter in China and South Korea, but it softened in most other countries. The rate of increase in economic activity slowed in Brazil, Mexico, and several other countries in Latin America in the fourth quarter, but remained generally strong. In the United States, the headline CPI continued to rise rapidly in January but was flat in February. For those two months on average, the rate of headline inflation was down significantly from its elevated level in the fourth quarter of 2007, as retail energy prices stopped rising and core inflation moderated a bit; these two factors more than offset an acceleration of food prices. However, the increase in world petroleum prices in early March pointed to a renewed burst of energy price inflation in the near term. Available information, including producer prices for February, suggested that prices of core personal consumption expenditures (PCE) moved up a bit more slowly than the core CPI in January and somewhat faster than the core CPI in February. Household survey measures of expectations for year-ahead inflation jumped in March to their highest levels in about two years; in contrast, survey measures of longer-term inflation expectations were unchanged or up slightly. Average hourly earnings increased at a somewhat slower rate in January and February than they had in November and December. Over the twelve months that ended in February, this wage measure rose a bit more slowly than in the previous twelve months. At its January 30 meeting, the FOMC lowered its target for the federal funds rate 50 basis points, to 3 percent. In addition, the Board of Governors approved a decrease of 50 basis points in the discount rate, to 3-1/2 percent. The Committee's statement noted that financial markets remained under considerable stress and that credit had tightened further for some businesses and households. Moreover, incoming information indicated a deepening of the housing contraction as well as some softening in labor markets. The Committee expected inflation to moderate in coming quarters but said that it would be necessary to continue to monitor inflation developments carefully. The Committee indicated that its action, combined with the policy actions taken earlier, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, the Committee noted that downside risks to growth remained. The Committee stated that it would continue to assess the effects of financial and other developments on economic prospects and would act in a timely manner as needed to address these risks. Over the intermeeting period, conditions in some short-term funding markets worsened. Spreads in interbank funding markets widened, as did spreads on lower-rated commercial paper. Obtaining credit through repurchase agreements backed by agency and private-label mortgage-backed securities (MBS) also became more difficult amid reports of larger "haircuts" being applied by lenders and news that some market participants missed margin calls on positions as a result. Concerns over the health of financial guarantors caused dislocations in the markets for municipal securities, and the ratios of municipal bond yields to those on comparable-maturity Treasuries climbed to historically high levels. In longer-term corporate markets, yields on investment-grade and speculative-grade corporate bonds rose, pushing their spreads relative to Treasuries to the highest levels since 2002 or even earlier in some cases. Nonetheless, gross bond issuance in January and February remained solid for investment-grade firms. Commercial bank credit decelerated in January and February, damped by a reduction in merger and acquisition activity, weak business spending, fewer previously committed loan deals coming onto banks' books, and slower residential mortgage lending. Commercial real estate lending at banks, however, continued to advance briskly in January and February, while the rise in consumer loans was moderate. Over the intermeeting period, spreads on conforming and jumbo residential mortgages over comparable-maturity Treasury securities jumped, and credit default swap premiums for the government-sponsored enterprises increased to record highs. Issuance of conforming MBS continued to be strong, while credit availability for jumbo and nonprime mortgage borrowers remained tight. Broad stock price indexes fell further over the intermeeting period on negative economic news as well as concerns about the outlook for many financial institutions. Similar stresses were again evident in the financial markets of major foreign economies. However, economic news in these economies was generally less downbeat than in the United States, leading to expectations of greater monetary easing in the United States than elsewhere. The trade-weighted foreign exchange value of the dollar against major currencies declined notably. M2 increased strongly in January and February, boosted primarily by heightened demands for the relative safety and liquidity of money market mutual funds. The decline in opportunity costs associated with monetary policy easing also supported rapid growth of liquid deposits. In the two weeks prior to the March meeting, the Federal Reserve announced several measures to bolster liquidity and promote orderly functioning in financial markets. On March 7, the Federal Reserve announced that it would initiate a series of term repurchase transactions that would facilitate funding of primary dealers' assets and that the volume of lending through the Term Auction Facility (TAF) would be increased. On March 11, the Federal Reserve, in coordination with other central banks, announced the expansion and extension of the reciprocal currency arrangements that were established in December as well as the creation of a Term Securities Lending Facility (TSLF) under which the Federal Reserve would lend Treasury securities to primary dealers for longer terms than in the existing program and based on a broader range of collateral. On March 14, the Federal Reserve Board approved the temporary financing arrangement announced that morning by JPMorgan Chase & Co. and The Bear Stearns Companies Inc. On March 16, the Federal Reserve announced the creation of a lending facility to improve the ability of primary dealers to provide financing to participants in securitization markets. In addition, the Federal Reserve lowered the primary credit rate, or discount rate, 25 basis points to 3.25 percent, and extended the maximum maturity of primary credit loans to ninety days from thirty days. It also approved the longer-term financing arrangement announced that evening by JPMorgan Chase and Bear Stearns in conjunction with the acquisition of Bear Stearns by JPMorgan Chase. Over the intermeeting period, the expected path of monetary policy over the next year as measured by money market futures rates moved down sharply, largely in response to softer-than-expected economic data releases and deteriorating financial market conditions. The Committee's action at the January 30 meeting had been viewed by market participants as the most likely outcome, but near-term futures rates declined a few basis points as investors had placed some probability on a smaller policy move. Neither the subsequent release of the minutes of the meeting nor the March 7 Federal Reserve announcements elicited significant market reaction. The March 11 TSLF announcement was followed by a step-up in money market futures rates as liquidity concerns eased somewhat and market participants evidently concluded that less policy easing would be needed than previously anticipated. However, liquidity concerns reemerged subsequently, prompting a further drop in money market futures rates. Consistent with the shift in the economic outlook, the revision in policy expectations, and the reduction in the target federal funds rate, yields on short- and medium-term nominal Treasury coupon securities declined substantially after the January 30 FOMC meeting. However, yields on long-term Treasuries fell much less than those on shorter-term instruments, and the yield curve steepened significantly. Inflation compensation--the difference between yields on nominal Treasury securities and those on inflation-indexed issues--was little changed on balance for shorter-term issues, but longer-term inflation compensation rose. In the forecast prepared for this meeting, the staff substantially revised down its projection for the pace of real GDP throughout 2008. Although the available data on spending and production early in the first quarter were not materially weaker than the staff's expectations, many other indicators of real activity were more negative. Payroll employment declined substantially; oil prices surged again, crimping real household incomes; and measures of consumer and business sentiment deteriorated sharply. Moreover, house prices fell by more than anticipated, and conditions in a broad range of debt markets became more restrictive. The staff projection showed a contraction of real GDP in the first half of 2008 followed by a slow rise in the second half. The recently enacted fiscal stimulus package was expected to boost real GDP in the second half of 2008, but that effect was projected to unwind in 2009. The forecast showed real GDP rising at a rate somewhat above the growth rate of its potential in 2009, in response to the impetus from cumulative monetary policy easing, continued strength in net exports, a lessening drag from high oil prices, and a relaxation of financial market strains. Even with this pickup in growth in 2009, resource utilization was anticipated to follow a lower trajectory than in the previous forecast. The forecast for core PCE price inflation over the first half of 2008 was raised in response to elevated readings in recent months. In addition, the forecast for headline PCE price inflation incorporated a much higher rate of increase for energy prices for the first half of the year; as a result, headline PCE price inflation was expected to substantially exceed core PCE price inflation in 2008. By 2009, the forecasts for both the headline and core PCE price indexes showed inflation receding from its 2008 level, in line with the previous forecasts. In their discussion of the economic situation and outlook, FOMC participants noted that prospects for both economic activity and near-term inflation had deteriorated in view of increasingly fragile financial markets and tighter credit conditions, rising prices for oil and other commodities, and the deepening contraction in the housing sector. Home prices had declined more steeply than anticipated, and the weakening housing market, combined with a softening in labor markets, appeared to be weighing on consumer sentiment. Businesses also were seen as becoming more pessimistic and cautious, despite a strong foreign demand for U.S. goods. Strains in financial markets had increased, portending a possible further tightening in the availability of credit to households and businesses. Against this backdrop, many participants thought some contraction in economic activity in the first half of 2008 now appeared likely. The economy was expected to begin to recover in the second half of the year, supported by recent monetary policy easing and fiscal stimulus. Accommodative monetary policy and a recovery in financial markets along with an abatement of the downdraft in housing activity were expected to help foster a further pickup in economic growth in 2009. However, considerable uncertainty surrounded this forecast, and some participants expressed concern that falling house prices and stresses in financial markets could lead to a more severe and protracted downturn in activity than currently anticipated. Participants noted that recent readings on inflation had generally been elevated, that energy prices had risen sharply, and that some indicators of inflation expectations had risen. Most participants anticipated that a flattening of oil and other commodity prices and easing pressures on resources would contribute to some moderation in inflation pressures. Nonetheless, uncertainties about the outlook for inflation had risen. Stresses in financial markets had intensified noticeably since the January meeting. Several meeting participants noted that price discovery for mortgage-related financial assets had become increasingly difficult in an environment of declining house prices and considerable uncertainty as to the ultimate extent of such declines. With the magnitude and distribution of losses on mortgage assets quite unclear and many financial institutions experiencing significant balance sheet pressures, many lenders pulled back from risk taking--notably by increasing collateral margins on secured lending--and liquidity diminished in a number of financial markets. In these circumstances, many market participants were experiencing greater difficulties obtaining funding, and meeting participants regarded financial markets as unusually fragile. The new liquidity facilities recently introduced by the Federal Reserve would probably be helpful in bolstering market liquidity and promoting orderly market functioning, but even so, the ongoing strains were likely to raise the price and reduce the availability of credit to businesses and households. Evidence that an adverse feedback loop was under way, in which a restriction in credit availability prompts a deterioration in the economic outlook that, in turn, spurs additional tightening in credit conditions, was discussed. Several participants noted that the problems of declining asset values, credit losses, and strained financial market conditions could be quite persistent, restraining credit availability and thus economic activity for a time and having the potential subsequently to delay and damp economic recovery. Participants noted that the contraction in the housing sector had deepened and that considerable uncertainty surrounded the outlook for housing. Although some stabilization in housing markets was likely needed to help underpin an economic recovery in coming quarters, there was little indication that that process had yet begun. Elevated rates of foreclosures and large inventories of unsold property were likely to depress home prices for some time. Lower home prices would eventually buoy home buying, but in the meantime the prospect of continued price declines could lead potential homebuyers to defer purchases for a time, further damping housing activity and adding to downward pressure on home values. Participants noted that the trajectory of house prices was a major source of uncertainty in their economic outlook. Recent data and anecdotal reports from business contacts suggested that consumer spending was decelerating noticeably, though it apparently had not yet actually declined substantially. Participants noted that private payroll employment had fallen in February for the third consecutive month, and suggested that increasing concerns among workers about prospects for employment and income likely were holding down consumer outlays. Rising energy prices were also damping growth in real incomes. One participant reported that lenders were restricting draws on home equity lines, and the tightening of credit availability more generally was probably starting to constrain consumer spending. Also, the continued fall in home prices and declines in equity prices were weighing on household wealth, with a depressing effect on spending. The outlook for business spending had also dimmed since the time of the January meeting. Anecdotal reports from many regions of the country pointed to a retrenchment in capital spending in response to increased pessimism about economic prospects and heightened caution on the part of business managers. The tightening supply of credit was seen as exacerbating this softness in business outlays and contributing particularly to a pullback from nonresidential construction projects. However, investment spending on agricultural equipment was reported to be quite strong, spurred by soaring crop prices. Reports on inventories were mixed but, overall, inventories appeared to be roughly in balance with desired levels. In discussing the external sector of the economy, some participants indicated that net exports remained a notable source of support for the economy. Growth in exports was being supported by strength in foreign economies as well as declines in the foreign exchange value of the dollar. However, some of the recent increase in net exports resulted from weaker imports, which reflected softer domestic spending. Some participants saw somewhat slower global economic growth as a possible consequence of the problems in financial markets and weakness in the United States and noted that such a development could potentially limit the support that exports would provide to the U.S. economy going forward. The recent information on inflation was seen as disappointing. With the exception of the February report on consumer prices, readings on inflation had generally been elevated. Agricultural prices were rising at a substantial clip, partly in response to strong global demand, lean supplies, and a lower foreign exchange value of the dollar. Other commodity prices also were climbing rapidly, and crude oil prices were near record levels. Several participants stated that business contacts had emphasized that their input costs were rising and that they were seeking to pass on higher costs to their customers. Some participants, however, expressed the view that emerging economic slack would limit the extent to which firms could pass on their higher costs and could serve to damp inflation more generally. Moreover, available data and anecdotal reports suggested that unit labor costs were rising only modestly, and thus were seen as unlikely to exert significant upward pressure on prices. Weaker growth, both in the United States and abroad, should also contribute to a flattening of oil and other commodity prices over time, which would also reduce price pressures and the threat of rising inflation expectations. On balance, most participants still expected inflation to moderate later this year and in 2009. However, the recent depreciation of the dollar could boost import prices and thus contribute to higher inflation. Moreover, with both core and headline inflation having been somewhat elevated, participants expressed some concern that inflation expectations might become less firmly anchored. Indeed, some indicators suggested that inflation expectations had edged higher of late. In view of these considerations, significant uncertainty attended the near-term outlook for price pressures. On balance, however, participants emphasized that appropriate monetary policy, combined with effective communication of the Committee's commitment to price stability, would foster price stability over time. In the Committee's discussion of monetary policy for the intermeeting period, most members judged that a substantial easing in the stance of monetary policy was warranted at this meeting. The outlook for economic activity had weakened considerably since the January meeting, and members viewed the downside risks to economic growth as having increased. Indeed, some believed that a prolonged and severe economic downturn could not be ruled out given the further restriction of credit availability and ongoing weakness in the housing market. Members recognized that monetary policy alone could not address fully the underlying problems in the housing market and in financial markets, but they noted that, through a range of channels, lower short-term real interest rates should help buoy economic activity and ameliorate strains in these markets. Even with a substantial easing at this meeting, most members saw overall inflation as likely to moderate in coming quarters, reflecting a projected leveling-out of energy and commodity prices and an easing of pressures on resource utilization. However, inflation pressures had apparently risen even as the outlook for growth had weakened. With the uncertainties in the outlook for both economic activity and inflation elevated, members noted that appropriately calibrating the stance of policy was difficult, partly because some time would be required to assess the effects of the substantial easing of policy to date. All in all, members judged that a 75 basis point easing of policy at this meeting was appropriate to address the combination of risks of slowing economic growth, inflationary pressures, and financial market disruptions. The Committee agreed that the statement to be released after the meeting should indicate that economic activity had weakened further, reflecting slower growth in consumer spending and softening in the labor market, that financial markets remained under considerable stress, and that the tightening of credit conditions and the deepening of the housing market contraction were likely to weigh on economic growth over the next few quarters. Given recent developments, the Committee concurred that the statement should note that inflation had been elevated and that some indicators of inflation expectations had risen, but agreed that the announcement should also reiterate that inflation was expected to moderate in coming quarters. As in recent statements, the Committee emphasized that it would continue to monitor inflation developments carefully. The Federal Reserve had implemented a number of measures to foster market liquidity in recent weeks, and members thought that the statement should note that policy actions taken today and earlier, including those liquidity measures, would promote moderate growth over time. In light of the uncertainties regarding the housing sector and financial market developments, however, the Committee repeated its recent indications that downside risks to growth remained. The Committee agreed on the need to act in a timely manner to promote its dual objectives of sustainable economic growth and price stability. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee in the immediate future seeks conditions in reserve markets consistent with reducing the federal funds rate to an average of around 2-1/4 percent." The vote encompassed approval of the statement below to be released at 2:15 p.m.: "The Federal Open Market Committee decided today to lower its target for the federal funds rate 75 basis points to 2-1/4 percent. Recent information indicates that the outlook for economic activity has weakened further. Growth in consumer spending has slowed and labor markets have softened. Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters. Inflation has been elevated, and some indicators of inflation expectations have risen. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook has increased. It will be necessary to continue to monitor inflation developments carefully. Today's policy action, combined with those taken earlier, including measures to foster market liquidity, 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 act in a timely manner as needed to promote sustainable economic growth and price stability." Votes for this action: Messrs. Bernanke, Geithner, Kohn, Kroszner, and Mishkin, Ms. Pianalto, Messrs. Stern and Warsh. Votes against this action: Messrs. Fisher and Plosser. Messrs. Fisher and Plosser dissented because, in light of heightened inflation risks, they favored easing policy less aggressively. Incoming data suggested a weaker near-term outlook for economic growth, but the Committee's earlier policy moves had already reduced the target federal funds rate by 225 basis points to address risks to growth, and the full effect of those rate cuts had yet to be felt. While financial markets remained under stress, the Federal Reserve had already taken separate, significant actions to address liquidity issues in markets. In fact, Mr. Fisher felt that focusing on measures targeted at relieving liquidity strains would improve economic prospects more quickly and lastingly than would further reductions in the federal funds rate at this point; he believed that alleviating these strains would increase the efficacy of the earlier rate cuts. Both Messrs. Fisher and Plosser were concerned that inflation expectations could potentially become unhinged should the Committee continue to lower the funds rate in the current environment. They pointed to measures of inflation and indicators of inflation expectations that had risen, and Mr. Fisher stressed the international influences on U.S. inflation rates. Mr. Plosser noted that the Committee could not afford to wait until there was clear evidence that inflation expectations were no longer anchored, as by then it would be too late to prevent a further increase in inflation pressures. It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, April 29-30, 2008. The meeting adjourned at 1:15 p.m. Notation VoteBy notation vote completed on February 19, 2008, the Committee unanimously approved the minutes of the FOMC meeting held on January 29-30, 2008. Conference CallOn March 10, 2008, the Committee met to review financial market developments and to consider proposals aimed at supporting the liquidity and orderly functioning of those markets. In light of the sharp further deterioration of some key money and credit markets, and against the backdrop of a weaker economic outlook, meeting participants discussed the potential usefulness and risks of instituting a Term Securities Lending Facility, under which primary dealers would be able to borrow Treasury securities for a term of approximately one month against any collateral eligible for open market operations and the highest-quality private mortgage securities. Most participants concluded that offering this facility was an appropriate step that could help alleviate pressures in the financing markets for Treasury and some mortgage-backed securities. By improving conditions in funding markets, the measure was expected to help restore the functioning of financial markets more generally and thereby promote the effective conduct of monetary policy as well as macroeconomic stability. During the discussion, participants expressed concerns that establishment of the facility could be viewed as setting a precedent and thus raise expectations of other actions in the future, and they also noted some uncertainty about how effective the facility would be in practice. On balance, the Committee decided that the facility could prove useful in preventing an escalation of an unhealthy dynamic that was developing in money and credit markets, in which liquidity and collateral concerns were spreading. In addition, the Committee agreed to expand and extend the existing reciprocal currency agreements with the European Central Bank and the Swiss National Bank. The Committee voted to approve the following resolutions: Term Securities Lending Facility.In addition to the current authorization granted to the Federal Reserve Bank of New York to engage in overnight securities lending transactions, and in order to ensure the effective conduct of open market operations, the Federal Open Market Committee authorizes the Federal Reserve Bank of New York to lend up to $200 billion of U.S. Government securities held in the System Open Market Account to primary dealers for a term that does not exceed 35 days at rates that shall be determined by competitive bidding. These lending transactions may be against pledges of U.S. Government securities, other assets that the Reserve Bank is specifically authorized to buy and sell under section 14 of the Federal Reserve Act (including federal agency residential-mortgage-backed securities (MBS)), and non-agency AAA-rated residential MBS. The Federal Reserve Bank of New York shall set a minimum lending fee consistent with the objectives of the program and apply reasonable limitations on the total amount of a specific issue that may be auctioned and on the amount of securities that each dealer may borrow. The Federal Reserve Bank of New York may reject bids which could facilitate a dealer's ability to control a single issue as determined solely by the Federal Reserve Bank of New York. This authority shall expire at such time as determined by the Federal Open Market Committee or the Board of Governors. Secretary's note: By notation vote completed on March 20, 2008, the Committee unanimously approved a resolution that added non-agency AAA-rated commercial-mortgage-backed securities to the list of collateral acceptable in connection with the Term Securities Lending Facility. Swap Authorizations.The Federal Open Market Committee directs the Federal Reserve Bank of New York to increase the amount available from the System Open Market Account under the existing reciprocal currency arrangement ("swap" arrangement) with the European Central Bank to an amount not to exceed $30 billion. Within that aggregate limit, draws of up to $15 billion are hereby authorized. The current swap arrangement shall be extended until September 30, 2008, unless further extended by the Federal Open Market Committee. The Federal Open Market Committee directs the Federal Reserve Bank of New York to increase the amount available from the System Open Market Account under the existing reciprocal currency arrangement ("swap" arrangement) with the Swiss National Bank to an amount not to exceed $6 billion. Draws are authorized up to the full amount of the swap. The current swap arrangement shall be extended until September 30, 2008, unless further extended by the Federal Open Market Committee. Votes for these actions: Messrs. Bernanke, Geithner, Fisher, Kohn, and Kroszner, Ms. Pianalto, Messrs. Plosser and Warsh, and Ms. Yellen. Votes against these actions: None. Absent and not voting: Mr. Mishkin. Ms. Yellen voted as alternate member. _____________________________ Brian F. MadiganSecretary Return to top

2008-03-18

Statement

The Federal Open Market Committee decided today to lower its target for the federal funds rate 75 basis points to 2-1/4 percent. Recent information indicates that the outlook for economic activity has weakened further. Growth in consumer spending has slowed and labor markets have softened.  Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters. Inflation has been elevated, and some indicators of inflation expectations have risen.  The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization.  Still, uncertainty about the inflation outlook has increased.  It will be necessary to continue to monitor inflation developments carefully. Today’s policy action, combined with those taken earlier, including measures to foster market liquidity, 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 act in a timely manner as needed to promote sustainable economic growth and price stability. 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; Gary H. Stern; and Kevin M. Warsh.  Voting against were Richard W. Fisher and Charles I. Plosser, who preferred less aggressive action at this meeting. In a related action, the Board of Governors unanimously approved a 75-basis-point decrease in the discount rate to 2-1/2 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, and San Francisco.

2008-03-10

Statement

Since the coordinated actions taken in December 2007, the G-10 central banks have continued to work together closely and to consult regularly on liquidity pressures in funding markets. Pressures in some of these markets have recently increased again. We all continue to work together and will take appropriate steps to address those liquidity pressures.   To that end, today the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, and the Swiss National Bank are announcing specific measures. Federal Reserve ActionsThe Federal Reserve announced today an expansion of its securities lending program.  Under this new Term Securities Lending Facility (TSLF), the Federal Reserve will 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-backed securities (MBS), and non-agency AAA/Aaa-rated private-label residential MBS.  The TSLF is intended to promote liquidity in the financing markets for Treasury and other collateral and thus to foster the functioning of financial markets more generally.  As is the case with the current securities lending program, securities will be made available through an auction process.  Auctions will be held on a weekly basis, beginning on March 27, 2008.  The Federal Reserve will consult with primary dealers on technical design features of the TSLF. In addition, the Federal Open Market Committee has authorized increases in its existing temporary reciprocal currency arrangements (swap lines) with the European Central Bank (ECB) and the Swiss National Bank (SNB).  These arrangements will now provide dollars in amounts of up to $30 billion and $6 billion to the ECB and the SNB, respectively, representing increases of $10 billion and $2 billion.  The FOMC extended the term of these swap lines through September 30, 2008. The actions announced today supplement the measures announced by the Federal Reserve on Friday to boost the size of the Term Auction Facility to $100 billion and to undertake a series of term repurchase transactions that will cumulate to $100 billion. Information on Related Actions Being Taken by Other Central BanksInformation on the actions that will be taken by other central banks is available at the following websites: Bank of Canada  Bank of England European Central Bank Swiss National Bank (61 KB PDF)  Statements by Other Central BanksBank of Japan Sveriges Riksbank Term Securities Lending FacilityTerms and conditionsFrequently asked questions

N/A

Minute

A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, March 18, 2008 at 8:30 a.m. Present:Mr. Bernanke, ChairmanMr. Geithner, Vice ChairmanMr. FisherMr. KohnMr. KrosznerMr. MishkinMs. Pianalto Mr. PlosserMr. SternMr. Warsh Messrs. Evans, Lacker, and Lockhart, and Ms. Yellen, Alternate Members of the Federal Open Market Committee Messrs. Hoenig and Rosengren, Presidents of the Federal Reserve Banks of Kansas City and Boston, respectively Mr. Sapenaro, First Vice President, Federal Reserve Bank of St. Louis Mr. Madigan, Secretary and EconomistMs. Danker, Deputy SecretaryMr. Skidmore, Assistant SecretaryMs. Smith, Assistant SecretaryMr. Alvarez, General CounselMr. Ashton, Assistant General CounselMr. Sheets, Economist Mr. Stockton, Economist Messrs. Connors, English, and Kamin, Ms. Mester, Messrs. Rolnick, Rosenblum, Slifman, Sniderman, and Wilcox, Associate Economists Mr. Dudley, Manager, System Open Market Account Mr. Struckmeyer, Deputy Staff Director, Office of Staff Director for Management, Board of Governors Mr. Parkinson, Deputy Director, Division of Research and Statistics, Board of Governors Ms. Bailey, Deputy Director, Division of Banking Supervision and Regulation, Board of Governors Mr. Clouse, Deputy Director, Division of Monetary Affairs, Board of Governors Ms. Liang and Messrs. Reifschneider and Wascher, Associate Directors, Division of Research and Statistics, Board of Governors Mr. Gagnon, Visiting Associate Director, Division of Monetary Affairs, Board of Governors Mr. Blanchard, Assistant to the Board, Office of Board Members, Board of Governors Mr. Carpenter, Assistant Director, Division of Monetary Affairs, Board of Governors Mr. Small, Project Manager, Division of Monetary Affairs, Board of Governors Mr. Luecke, Section Chief, Division of Monetary Affairs, Board of Governors Ms. Low, Open Market Secretariat Specialist, Division of Monetary Affairs, Board of Governors Mr. Judd, Executive Vice President, Federal Reserve Bank of San Francisco Messrs. Altig, Rasche, Sellon, and Sullivan, Senior Vice Presidents, Federal Reserve Banks of Atlanta, St. Louis, Kansas City, and Chicago, respectively Mr. Olivei, Vice President, Federal Reserve Bank of Boston Mr. Pesenti, Assistant Vice President, Federal Reserve Bank of New York Mr. Hetzel, Senior Economist, Federal Reserve Bank of Richmond The Manager of the System Open Market Account reported on recent developments in foreign exchange markets. There were no open market operations in foreign currencies for the System's account in the period since the previous meeting. The Manager also reported on developments in domestic financial markets and on System open market operations in government securities and federal agency obligations during the period since the previous meeting. By unanimous vote, the Committee ratified these transactions. The information reviewed at the March meeting indicated that economic activity had continued to decelerate in recent months. The contraction in homebuilding intensified, consumer spending appeared to be weakening, and survey measures of both consumer and business sentiment were at depressed levels. Industrial production fell in February, and private payroll employment posted a third consecutive monthly decline. After having increased in recent months through January, both headline and core inflation as measured by the consumer price index (CPI) dropped noticeably in February. In early March, however, prices of oil and other commodities rose sharply. Labor demand softened markedly in recent months. The decline in private payroll employment that began last December steepened through February. Although employment by firms in the nonbusiness services sector and in state and local governments continued to rise, declines elsewhere were widespread. Losses were greatest in the manufacturing, construction, and retail trade sectors. Aggregate hours of private production or nonsupervisory workers fell slightly in the first two months of the year. The unemployment rate edged down to 4.8 percent in February, but was still up from the 4.5 percent rate of a year earlier. The labor force participation rate declined in February. Industrial production declined in February after edging up slightly in the previous two months. The output of utilities dropped back after a weather-related surge in January, while mining output fell somewhat in the first two months of the year on average. Manufacturing production edged down after having flattened out in January. The motor vehicle and construction-related industries continued to hold down overall manufacturing output even as high-tech production posted moderate increases. The factory utilization rate edged down in February to a level noticeably below its recent high in the third quarter of 2007. Real consumer spending appeared to have stalled in recent months. Real outlays for nondurable and durable consumer goods, including automobiles, were estimated to have declined, on average, in January and February. Real disposable personal income was unchanged in the fourth quarter, held down by higher food and energy prices, and moved up only slightly in January. Further declines in house prices led to a noticeable decrease in the ratio of household wealth to disposable income in the fourth quarter. The downturn in equity prices since December further reduced household wealth in the first quarter. Readings on consumer sentiment dropped sharply in February from already low levels, and the Reuters/University of Michigan survey remained at a depressed level in early March. The contraction in residential construction continued into early 2008. Single-family housing starts fell in both January and February. After having dropped especially sharply in December, multifamily housing starts rebounded somewhat in the first two months of the year. New home sales declined again in January, thereby pushing inventories of unsold homes to even higher levels relative to sales. Sales of existing homes held roughly steady in January, and the index of pending sales agreements in that month was consistent with flat sales in February and March. Overall, demand for housing continued to be restrained by tight financing conditions for jumbo and nonprime mortgages. Real spending on equipment and software rose at a sluggish rate in the fourth quarter. In January, orders and shipments of nondefense capital goods excluding aircraft were above their fourth-quarter levels. However, the overall outlook for capital spending in the first quarter was weak in light of the deterioration in surveys of business conditions and attitudes and the worsening situation in markets for business finance. On the heels of robust gains during most of last year, nominal spending on nonresidential structures decelerated in December and posted an outright decline in January. Although spending in this sector is often volatile, the recent deceleration was consistent with mounting indications of slowing demand for nonresidential buildings and tightening credit conditions. Real investment in nonfarm inventories excluding motor vehicles remained at a steady pace in the fourth quarter of 2007, but motor vehicle inventories fell sharply. After declining in November, the ratio of manufacturing and trade book-value inventories (excluding motor vehicles) to sales ticked up in December and held steady in January, but this ratio remained well below its average value in 2007. The U.S. international trade deficit narrowed substantially in December and was about unchanged in January. Exports rose sharply in both months, while imports dipped in December before recovering in January. Increases in exports were broadly based except for automotive exports, which dropped sharply in December and remained low in January. Imports of services were up moderately. Oil imports soared, reflecting increases in both prices and volumes. Most other categories of imports dropped in December and January on net, with especially large declines in imports of automotive and consumer goods. In the major advanced foreign economies, the rate of growth of real gross domestic product (GDP) generally declined in the fourth quarter. The source of the slowdown varied substantially across economies. In the euro area and in the United Kingdom, output was restrained by a softening in domestic demand. In contrast, Canadian domestic demand continued to increase at a very strong pace, but because of an offsetting steep decline in net exports, real GDP rose only modestly. Japan was the exception among the advanced foreign economies to the pattern of slower growth; real GDP there strengthened in the fourth quarter with higher domestic spending and continued strength in exports. Japanese exports to the United States, however, declined. Available first-quarter economic indicators for the advanced foreign economies were mixed, but, on balance, they pointed to slowing growth. Real activity also appeared to have slowed a bit in emerging markets, though it continued to advance at a fairly strong rate. In emerging Asia, the pace of real GDP growth picked up in the fourth quarter in China and South Korea, but it softened in most other countries. The rate of increase in economic activity slowed in Brazil, Mexico, and several other countries in Latin America in the fourth quarter, but remained generally strong. In the United States, the headline CPI continued to rise rapidly in January but was flat in February. For those two months on average, the rate of headline inflation was down significantly from its elevated level in the fourth quarter of 2007, as retail energy prices stopped rising and core inflation moderated a bit; these two factors more than offset an acceleration of food prices. However, the increase in world petroleum prices in early March pointed to a renewed burst of energy price inflation in the near term. Available information, including producer prices for February, suggested that prices of core personal consumption expenditures (PCE) moved up a bit more slowly than the core CPI in January and somewhat faster than the core CPI in February. Household survey measures of expectations for year-ahead inflation jumped in March to their highest levels in about two years; in contrast, survey measures of longer-term inflation expectations were unchanged or up slightly. Average hourly earnings increased at a somewhat slower rate in January and February than they had in November and December. Over the twelve months that ended in February, this wage measure rose a bit more slowly than in the previous twelve months. At its January 30 meeting, the FOMC lowered its target for the federal funds rate 50 basis points, to 3 percent. In addition, the Board of Governors approved a decrease of 50 basis points in the discount rate, to 3-1/2 percent. The Committee's statement noted that financial markets remained under considerable stress and that credit had tightened further for some businesses and households. Moreover, incoming information indicated a deepening of the housing contraction as well as some softening in labor markets. The Committee expected inflation to moderate in coming quarters but said that it would be necessary to continue to monitor inflation developments carefully. The Committee indicated that its action, combined with the policy actions taken earlier, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, the Committee noted that downside risks to growth remained. The Committee stated that it would continue to assess the effects of financial and other developments on economic prospects and would act in a timely manner as needed to address these risks. Over the intermeeting period, conditions in some short-term funding markets worsened. Spreads in interbank funding markets widened, as did spreads on lower-rated commercial paper. Obtaining credit through repurchase agreements backed by agency and private-label mortgage-backed securities (MBS) also became more difficult amid reports of larger "haircuts" being applied by lenders and news that some market participants missed margin calls on positions as a result. Concerns over the health of financial guarantors caused dislocations in the markets for municipal securities, and the ratios of municipal bond yields to those on comparable-maturity Treasuries climbed to historically high levels. In longer-term corporate markets, yields on investment-grade and speculative-grade corporate bonds rose, pushing their spreads relative to Treasuries to the highest levels since 2002 or even earlier in some cases. Nonetheless, gross bond issuance in January and February remained solid for investment-grade firms. Commercial bank credit decelerated in January and February, damped by a reduction in merger and acquisition activity, weak business spending, fewer previously committed loan deals coming onto banks' books, and slower residential mortgage lending. Commercial real estate lending at banks, however, continued to advance briskly in January and February, while the rise in consumer loans was moderate. Over the intermeeting period, spreads on conforming and jumbo residential mortgages over comparable-maturity Treasury securities jumped, and credit default swap premiums for the government-sponsored enterprises increased to record highs. Issuance of conforming MBS continued to be strong, while credit availability for jumbo and nonprime mortgage borrowers remained tight. Broad stock price indexes fell further over the intermeeting period on negative economic news as well as concerns about the outlook for many financial institutions. Similar stresses were again evident in the financial markets of major foreign economies. However, economic news in these economies was generally less downbeat than in the United States, leading to expectations of greater monetary easing in the United States than elsewhere. The trade-weighted foreign exchange value of the dollar against major currencies declined notably. M2 increased strongly in January and February, boosted primarily by heightened demands for the relative safety and liquidity of money market mutual funds. The decline in opportunity costs associated with monetary policy easing also supported rapid growth of liquid deposits. In the two weeks prior to the March meeting, the Federal Reserve announced several measures to bolster liquidity and promote orderly functioning in financial markets. On March 7, the Federal Reserve announced that it would initiate a series of term repurchase transactions that would facilitate funding of primary dealers' assets and that the volume of lending through the Term Auction Facility (TAF) would be increased. On March 11, the Federal Reserve, in coordination with other central banks, announced the expansion and extension of the reciprocal currency arrangements that were established in December as well as the creation of a Term Securities Lending Facility (TSLF) under which the Federal Reserve would lend Treasury securities to primary dealers for longer terms than in the existing program and based on a broader range of collateral. On March 14, the Federal Reserve Board approved the temporary financing arrangement announced that morning by JPMorgan Chase & Co. and The Bear Stearns Companies Inc. On March 16, the Federal Reserve announced the creation of a lending facility to improve the ability of primary dealers to provide financing to participants in securitization markets. In addition, the Federal Reserve lowered the primary credit rate, or discount rate, 25 basis points to 3.25 percent, and extended the maximum maturity of primary credit loans to ninety days from thirty days. It also approved the longer-term financing arrangement announced that evening by JPMorgan Chase and Bear Stearns in conjunction with the acquisition of Bear Stearns by JPMorgan Chase. Over the intermeeting period, the expected path of monetary policy over the next year as measured by money market futures rates moved down sharply, largely in response to softer-than-expected economic data releases and deteriorating financial market conditions. The Committee's action at the January 30 meeting had been viewed by market participants as the most likely outcome, but near-term futures rates declined a few basis points as investors had placed some probability on a smaller policy move. Neither the subsequent release of the minutes of the meeting nor the March 7 Federal Reserve announcements elicited significant market reaction. The March 11 TSLF announcement was followed by a step-up in money market futures rates as liquidity concerns eased somewhat and market participants evidently concluded that less policy easing would be needed than previously anticipated. However, liquidity concerns reemerged subsequently, prompting a further drop in money market futures rates. Consistent with the shift in the economic outlook, the revision in policy expectations, and the reduction in the target federal funds rate, yields on short- and medium-term nominal Treasury coupon securities declined substantially after the January 30 FOMC meeting. However, yields on long-term Treasuries fell much less than those on shorter-term instruments, and the yield curve steepened significantly. Inflation compensation--the difference between yields on nominal Treasury securities and those on inflation-indexed issues--was little changed on balance for shorter-term issues, but longer-term inflation compensation rose. In the forecast prepared for this meeting, the staff substantially revised down its projection for the pace of real GDP throughout 2008. Although the available data on spending and production early in the first quarter were not materially weaker than the staff's expectations, many other indicators of real activity were more negative. Payroll employment declined substantially; oil prices surged again, crimping real household incomes; and measures of consumer and business sentiment deteriorated sharply. Moreover, house prices fell by more than anticipated, and conditions in a broad range of debt markets became more restrictive. The staff projection showed a contraction of real GDP in the first half of 2008 followed by a slow rise in the second half. The recently enacted fiscal stimulus package was expected to boost real GDP in the second half of 2008, but that effect was projected to unwind in 2009. The forecast showed real GDP rising at a rate somewhat above the growth rate of its potential in 2009, in response to the impetus from cumulative monetary policy easing, continued strength in net exports, a lessening drag from high oil prices, and a relaxation of financial market strains. Even with this pickup in growth in 2009, resource utilization was anticipated to follow a lower trajectory than in the previous forecast. The forecast for core PCE price inflation over the first half of 2008 was raised in response to elevated readings in recent months. In addition, the forecast for headline PCE price inflation incorporated a much higher rate of increase for energy prices for the first half of the year; as a result, headline PCE price inflation was expected to substantially exceed core PCE price inflation in 2008. By 2009, the forecasts for both the headline and core PCE price indexes showed inflation receding from its 2008 level, in line with the previous forecasts. In their discussion of the economic situation and outlook, FOMC participants noted that prospects for both economic activity and near-term inflation had deteriorated in view of increasingly fragile financial markets and tighter credit conditions, rising prices for oil and other commodities, and the deepening contraction in the housing sector. Home prices had declined more steeply than anticipated, and the weakening housing market, combined with a softening in labor markets, appeared to be weighing on consumer sentiment. Businesses also were seen as becoming more pessimistic and cautious, despite a strong foreign demand for U.S. goods. Strains in financial markets had increased, portending a possible further tightening in the availability of credit to households and businesses. Against this backdrop, many participants thought some contraction in economic activity in the first half of 2008 now appeared likely. The economy was expected to begin to recover in the second half of the year, supported by recent monetary policy easing and fiscal stimulus. Accommodative monetary policy and a recovery in financial markets along with an abatement of the downdraft in housing activity were expected to help foster a further pickup in economic growth in 2009. However, considerable uncertainty surrounded this forecast, and some participants expressed concern that falling house prices and stresses in financial markets could lead to a more severe and protracted downturn in activity than currently anticipated. Participants noted that recent readings on inflation had generally been elevated, that energy prices had risen sharply, and that some indicators of inflation expectations had risen. Most participants anticipated that a flattening of oil and other commodity prices and easing pressures on resources would contribute to some moderation in inflation pressures. Nonetheless, uncertainties about the outlook for inflation had risen. Stresses in financial markets had intensified noticeably since the January meeting. Several meeting participants noted that price discovery for mortgage-related financial assets had become increasingly difficult in an environment of declining house prices and considerable uncertainty as to the ultimate extent of such declines. With the magnitude and distribution of losses on mortgage assets quite unclear and many financial institutions experiencing significant balance sheet pressures, many lenders pulled back from risk taking--notably by increasing collateral margins on secured lending--and liquidity diminished in a number of financial markets. In these circumstances, many market participants were experiencing greater difficulties obtaining funding, and meeting participants regarded financial markets as unusually fragile. The new liquidity facilities recently introduced by the Federal Reserve would probably be helpful in bolstering market liquidity and promoting orderly market functioning, but even so, the ongoing strains were likely to raise the price and reduce the availability of credit to businesses and households. Evidence that an adverse feedback loop was under way, in which a restriction in credit availability prompts a deterioration in the economic outlook that, in turn, spurs additional tightening in credit conditions, was discussed. Several participants noted that the problems of declining asset values, credit losses, and strained financial market conditions could be quite persistent, restraining credit availability and thus economic activity for a time and having the potential subsequently to delay and damp economic recovery. Participants noted that the contraction in the housing sector had deepened and that considerable uncertainty surrounded the outlook for housing. Although some stabilization in housing markets was likely needed to help underpin an economic recovery in coming quarters, there was little indication that that process had yet begun. Elevated rates of foreclosures and large inventories of unsold property were likely to depress home prices for some time. Lower home prices would eventually buoy home buying, but in the meantime the prospect of continued price declines could lead potential homebuyers to defer purchases for a time, further damping housing activity and adding to downward pressure on home values. Participants noted that the trajectory of house prices was a major source of uncertainty in their economic outlook. Recent data and anecdotal reports from business contacts suggested that consumer spending was decelerating noticeably, though it apparently had not yet actually declined substantially. Participants noted that private payroll employment had fallen in February for the third consecutive month, and suggested that increasing concerns among workers about prospects for employment and income likely were holding down consumer outlays. Rising energy prices were also damping growth in real incomes. One participant reported that lenders were restricting draws on home equity lines, and the tightening of credit availability more generally was probably starting to constrain consumer spending. Also, the continued fall in home prices and declines in equity prices were weighing on household wealth, with a depressing effect on spending. The outlook for business spending had also dimmed since the time of the January meeting. Anecdotal reports from many regions of the country pointed to a retrenchment in capital spending in response to increased pessimism about economic prospects and heightened caution on the part of business managers. The tightening supply of credit was seen as exacerbating this softness in business outlays and contributing particularly to a pullback from nonresidential construction projects. However, investment spending on agricultural equipment was reported to be quite strong, spurred by soaring crop prices. Reports on inventories were mixed but, overall, inventories appeared to be roughly in balance with desired levels. In discussing the external sector of the economy, some participants indicated that net exports remained a notable source of support for the economy. Growth in exports was being supported by strength in foreign economies as well as declines in the foreign exchange value of the dollar. However, some of the recent increase in net exports resulted from weaker imports, which reflected softer domestic spending. Some participants saw somewhat slower global economic growth as a possible consequence of the problems in financial markets and weakness in the United States and noted that such a development could potentially limit the support that exports would provide to the U.S. economy going forward. The recent information on inflation was seen as disappointing. With the exception of the February report on consumer prices, readings on inflation had generally been elevated. Agricultural prices were rising at a substantial clip, partly in response to strong global demand, lean supplies, and a lower foreign exchange value of the dollar. Other commodity prices also were climbing rapidly, and crude oil prices were near record levels. Several participants stated that business contacts had emphasized that their input costs were rising and that they were seeking to pass on higher costs to their customers. Some participants, however, expressed the view that emerging economic slack would limit the extent to which firms could pass on their higher costs and could serve to damp inflation more generally. Moreover, available data and anecdotal reports suggested that unit labor costs were rising only modestly, and thus were seen as unlikely to exert significant upward pressure on prices. Weaker growth, both in the United States and abroad, should also contribute to a flattening of oil and other commodity prices over time, which would also reduce price pressures and the threat of rising inflation expectations. On balance, most participants still expected inflation to moderate later this year and in 2009. However, the recent depreciation of the dollar could boost import prices and thus contribute to higher inflation. Moreover, with both core and headline inflation having been somewhat elevated, participants expressed some concern that inflation expectations might become less firmly anchored. Indeed, some indicators suggested that inflation expectations had edged higher of late. In view of these considerations, significant uncertainty attended the near-term outlook for price pressures. On balance, however, participants emphasized that appropriate monetary policy, combined with effective communication of the Committee's commitment to price stability, would foster price stability over time. In the Committee's discussion of monetary policy for the intermeeting period, most members judged that a substantial easing in the stance of monetary policy was warranted at this meeting. The outlook for economic activity had weakened considerably since the January meeting, and members viewed the downside risks to economic growth as having increased. Indeed, some believed that a prolonged and severe economic downturn could not be ruled out given the further restriction of credit availability and ongoing weakness in the housing market. Members recognized that monetary policy alone could not address fully the underlying problems in the housing market and in financial markets, but they noted that, through a range of channels, lower short-term real interest rates should help buoy economic activity and ameliorate strains in these markets. Even with a substantial easing at this meeting, most members saw overall inflation as likely to moderate in coming quarters, reflecting a projected leveling-out of energy and commodity prices and an easing of pressures on resource utilization. However, inflation pressures had apparently risen even as the outlook for growth had weakened. With the uncertainties in the outlook for both economic activity and inflation elevated, members noted that appropriately calibrating the stance of policy was difficult, partly because some time would be required to assess the effects of the substantial easing of policy to date. All in all, members judged that a 75 basis point easing of policy at this meeting was appropriate to address the combination of risks of slowing economic growth, inflationary pressures, and financial market disruptions. The Committee agreed that the statement to be released after the meeting should indicate that economic activity had weakened further, reflecting slower growth in consumer spending and softening in the labor market, that financial markets remained under considerable stress, and that the tightening of credit conditions and the deepening of the housing market contraction were likely to weigh on economic growth over the next few quarters. Given recent developments, the Committee concurred that the statement should note that inflation had been elevated and that some indicators of inflation expectations had risen, but agreed that the announcement should also reiterate that inflation was expected to moderate in coming quarters. As in recent statements, the Committee emphasized that it would continue to monitor inflation developments carefully. The Federal Reserve had implemented a number of measures to foster market liquidity in recent weeks, and members thought that the statement should note that policy actions taken today and earlier, including those liquidity measures, would promote moderate growth over time. In light of the uncertainties regarding the housing sector and financial market developments, however, the Committee repeated its recent indications that downside risks to growth remained. The Committee agreed on the need to act in a timely manner to promote its dual objectives of sustainable economic growth and price stability. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee in the immediate future seeks conditions in reserve markets consistent with reducing the federal funds rate to an average of around 2-1/4 percent." The vote encompassed approval of the statement below to be released at 2:15 p.m.: "The Federal Open Market Committee decided today to lower its target for the federal funds rate 75 basis points to 2-1/4 percent. Recent information indicates that the outlook for economic activity has weakened further. Growth in consumer spending has slowed and labor markets have softened. Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters. Inflation has been elevated, and some indicators of inflation expectations have risen. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook has increased. It will be necessary to continue to monitor inflation developments carefully. Today's policy action, combined with those taken earlier, including measures to foster market liquidity, 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 act in a timely manner as needed to promote sustainable economic growth and price stability." Votes for this action: Messrs. Bernanke, Geithner, Kohn, Kroszner, and Mishkin, Ms. Pianalto, Messrs. Stern and Warsh. Votes against this action: Messrs. Fisher and Plosser. Messrs. Fisher and Plosser dissented because, in light of heightened inflation risks, they favored easing policy less aggressively. Incoming data suggested a weaker near-term outlook for economic growth, but the Committee's earlier policy moves had already reduced the target federal funds rate by 225 basis points to address risks to growth, and the full effect of those rate cuts had yet to be felt. While financial markets remained under stress, the Federal Reserve had already taken separate, significant actions to address liquidity issues in markets. In fact, Mr. Fisher felt that focusing on measures targeted at relieving liquidity strains would improve economic prospects more quickly and lastingly than would further reductions in the federal funds rate at this point; he believed that alleviating these strains would increase the efficacy of the earlier rate cuts. Both Messrs. Fisher and Plosser were concerned that inflation expectations could potentially become unhinged should the Committee continue to lower the funds rate in the current environment. They pointed to measures of inflation and indicators of inflation expectations that had risen, and Mr. Fisher stressed the international influences on U.S. inflation rates. Mr. Plosser noted that the Committee could not afford to wait until there was clear evidence that inflation expectations were no longer anchored, as by then it would be too late to prevent a further increase in inflation pressures. It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, April 29-30, 2008. The meeting adjourned at 1:15 p.m. Notation VoteBy notation vote completed on February 19, 2008, the Committee unanimously approved the minutes of the FOMC meeting held on January 29-30, 2008. Conference CallOn March 10, 2008, the Committee met to review financial market developments and to consider proposals aimed at supporting the liquidity and orderly functioning of those markets. In light of the sharp further deterioration of some key money and credit markets, and against the backdrop of a weaker economic outlook, meeting participants discussed the potential usefulness and risks of instituting a Term Securities Lending Facility, under which primary dealers would be able to borrow Treasury securities for a term of approximately one month against any collateral eligible for open market operations and the highest-quality private mortgage securities. Most participants concluded that offering this facility was an appropriate step that could help alleviate pressures in the financing markets for Treasury and some mortgage-backed securities. By improving conditions in funding markets, the measure was expected to help restore the functioning of financial markets more generally and thereby promote the effective conduct of monetary policy as well as macroeconomic stability. During the discussion, participants expressed concerns that establishment of the facility could be viewed as setting a precedent and thus raise expectations of other actions in the future, and they also noted some uncertainty about how effective the facility would be in practice. On balance, the Committee decided that the facility could prove useful in preventing an escalation of an unhealthy dynamic that was developing in money and credit markets, in which liquidity and collateral concerns were spreading. In addition, the Committee agreed to expand and extend the existing reciprocal currency agreements with the European Central Bank and the Swiss National Bank. The Committee voted to approve the following resolutions: Term Securities Lending Facility.In addition to the current authorization granted to the Federal Reserve Bank of New York to engage in overnight securities lending transactions, and in order to ensure the effective conduct of open market operations, the Federal Open Market Committee authorizes the Federal Reserve Bank of New York to lend up to $200 billion of U.S. Government securities held in the System Open Market Account to primary dealers for a term that does not exceed 35 days at rates that shall be determined by competitive bidding. These lending transactions may be against pledges of U.S. Government securities, other assets that the Reserve Bank is specifically authorized to buy and sell under section 14 of the Federal Reserve Act (including federal agency residential-mortgage-backed securities (MBS)), and non-agency AAA-rated residential MBS. The Federal Reserve Bank of New York shall set a minimum lending fee consistent with the objectives of the program and apply reasonable limitations on the total amount of a specific issue that may be auctioned and on the amount of securities that each dealer may borrow. The Federal Reserve Bank of New York may reject bids which could facilitate a dealer's ability to control a single issue as determined solely by the Federal Reserve Bank of New York. This authority shall expire at such time as determined by the Federal Open Market Committee or the Board of Governors. Secretary's note: By notation vote completed on March 20, 2008, the Committee unanimously approved a resolution that added non-agency AAA-rated commercial-mortgage-backed securities to the list of collateral acceptable in connection with the Term Securities Lending Facility. Swap Authorizations.The Federal Open Market Committee directs the Federal Reserve Bank of New York to increase the amount available from the System Open Market Account under the existing reciprocal currency arrangement ("swap" arrangement) with the European Central Bank to an amount not to exceed $30 billion. Within that aggregate limit, draws of up to $15 billion are hereby authorized. The current swap arrangement shall be extended until September 30, 2008, unless further extended by the Federal Open Market Committee. The Federal Open Market Committee directs the Federal Reserve Bank of New York to increase the amount available from the System Open Market Account under the existing reciprocal currency arrangement ("swap" arrangement) with the Swiss National Bank to an amount not to exceed $6 billion. Draws are authorized up to the full amount of the swap. The current swap arrangement shall be extended until September 30, 2008, unless further extended by the Federal Open Market Committee. Votes for these actions: Messrs. Bernanke, Geithner, Fisher, Kohn, and Kroszner, Ms. Pianalto, Messrs. Plosser and Warsh, and Ms. Yellen. Votes against these actions: None. Absent and not voting: Mr. Mishkin. Ms. Yellen voted as alternate member. _____________________________ Brian F. MadiganSecretary Return to top

2008-02-20

Minute

A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, January 29, 2008 at 2:00 p.m. and continued on Wednesday, January 30, 2008 at 9:00 a.m. Present:Mr. Bernanke, ChairmanMr. Geithner, Vice ChairmanMr. FisherMr. KohnMr. KrosznerMr. MishkinMs. PianaltoMr. PlosserMr. SternMr. Warsh Messrs. Evans, Lacker, and Lockhart, and Ms. Yellen, Alternate Members of the Federal Open Market Committee Messrs. Hoenig, Poole, and Rosengren, Presidents of the Federal Reserve Banks of Kansas City, St. Louis, and Boston, respectively Mr. Madigan, Secretary and EconomistMs. Danker, Deputy SecretaryMr. Skidmore, Assistant SecretaryMs. Smith, Assistant SecretaryMr. Alvarez, General CounselMr. Baxter, Deputy General CounselMr. Sheets, EconomistMr. Stockton, Economist Messrs. Connors, English, and Kamin, Ms. Mester, Messrs. Rosenblum, Slifman, Sniderman, Tracy, and Wilcox, Associate Economists Mr. Dudley, Manager, System Open Market Account Mr. Struckmeyer,1 Deputy Staff Director, Office of Staff Director for Management, Board of Governors Mr. Parkinson,2 Deputy Director, Division of Research and Statistics, Board of Governors Mr. Clouse, Senior Associate Director, Division of Monetary Affairs, Board of Governors Ms. Liang and Messrs. Reifschneider and Wascher, Associate Directors, Division of Research and Statistics, Board of Governors Ms. Barger2 and Mr. Greenlee,2 Associate Directors, Division of Banking Supervision and Regulation, Board of Governors Mr. Gibson,2 Deputy Associate Director, Division of Research and Statistics, Board of Governors Mr. Dale, Senior Adviser, Division of Monetary Affairs, Board of Governors Mr. Oliner, Senior Adviser, Division of Research and Statistics, Board of Governors Messrs. Durham and Perli, Assistant Directors, Division of Monetary Affairs, Board of Governors Mr. Blanchard, Assistant to the Board, Office of Board Members, Board of Governors Mr. Small, Project Manager, Division of Monetary Affairs, Board of Governors Mr. Bassett,3 Senior Economist, Division of Monetary Affairs, Board of Governors Mr. Doyle,3 Senior Economist, Division of International Finance, Board of Governors Ms. Kusko, 3 Senior Economist, Division of Research and Statistics, Board of Governors Mr. Luecke, Senior Financial Analyst, Division of Monetary Affairs, Board of Governors Mr. Driscoll, Economist, Division of Monetary Affairs, Board of Governors Ms. Low, Open Market Secretariat Specialist, Division of Monetary Affairs, Board of Governors Ms. Green, First Vice President, Federal Reserve Bank of Richmond Messrs. Fuhrer and Judd, Executive Vice Presidents, Federal Reserve Banks of Boston and San Francisco, respectively Messrs. Altig and Angulo,2 Mses. Hirtle2 and Mosser, Messrs. Peters2 and Rasche, Senior Vice Presidents, Federal Reserve Banks of Atlanta, New York, New York, New York, New York, and St. Louis, respectively Mr. Hakkio, Senior Adviser, Federal Reserve Bank of Kansas City Mr. Krane, Vice President, Federal Reserve Bank of Chicago Mr. Weber, Senior Research Officer, Federal Reserve Bank of Minneapolis 1. Attended Wednesday's session. Return to text2. Attended portion of the meeting relating to the analysis of policy issues raised by financial market developments. Return to text3. Attended portion of the meeting relating to the economic outlook and monetary policy decision. Return to text In the agenda for this meeting, it was reported that advices of the election of the following members and alternate members of the Federal Open Market Committee for a term beginning January 29, 2008 had been received and that these individuals had executed their oaths of office. The elected members and alternate members were as follows: Timothy F. Geithner, President of the Federal Reserve Bank of New York, with Christine M. Cumming, First Vice President of the Federal Reserve Bank of New York, as alternate. Charles I. Plosser, President of the Federal Reserve Bank of Philadelphia, with Jeffrey M. Lacker, President of the Federal Reserve Bank of Richmond, as alternate. Sandra Pianalto, President of the Federal Reserve Bank of Cleveland, with Charles L. Evans, President of the Federal Reserve Bank of Chicago, as alternate. Richard W. Fisher, President of the Federal Reserve Bank of Dallas, with Dennis P. Lockhart, President of the Federal Reserve Bank of Atlanta, as alternate. Gary H. Stern, President of the Federal Reserve Bank of Minneapolis, with Janet L. Yellen, President of the Federal Reserve Bank of San Francisco, as alternate. By unanimous vote, the following officers of the Federal Open Market Committee were selected to serve until the selection of their successors at the first regularly scheduled meeting of the Committee in 2009: Ben S. Bernanke Chairman Timothy F. Geithner Vice Chairman Brian F. Madigan Secretary and Economist Deborah J. Danker Deputy Secretary David W. Skidmore Assistant Secretary Michelle A. Smith Assistant Secretary Scott G. Alvarez General Counsel Thomas C. Baxter, Jr. Deputy General Counsel Richard M. Ashton Assistant General Counsel D. Nathan Sheets Economist David J. Stockton Economist   Thomas A. Connors William B. English Steven B. Kamin Loretta J. Mester Arthur J. Rolnick Harvey Rosenblum Lawrence Slifman Mark S. Sniderman Joseph S. Tracy David W. Wilcox Associate Economists By unanimous vote, the Committee made a few amendments to its rules and to the Program for Security of FOMC Information. The amendments primarily addressed the Committee's practice of approving the minutes via notation vote, attendance at Committee meetings, and access to Committee information by System employees. By unanimous vote, the Federal Reserve Bank of New York was selected to execute transactions for the System Open Market Account. By unanimous vote, William C. Dudley was selected to serve at the pleasure of the Committee as Manager, System Open Market Account, on the understanding that his selection was subject to being satisfactory to the Federal Reserve Bank of New York. By unanimous vote, the Authorization for Domestic Open Market Operations was reaffirmed in the form shown below: AUTHORIZATION FOR DOMESTIC OPEN MARKET OPERATIONS(Reaffirmed January 29, 2008) 1. The Federal Open Market Committee authorizes and directs the Federal Reserve Bank of New York, to the extent necessary to carry out the most recent domestic policy directive adopted at a meeting of the Committee: (a) To buy or sell U.S. Government securities, including securities of the Federal Financing Bank, and securities that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the United States in the open market, from or to securities dealers and foreign and international accounts maintained at the Federal Reserve Bank of New York, on a cash, regular, or deferred delivery basis, for the System Open Market Account at market prices, and, for such Account, to exchange maturing U.S. Government and Federal agency securities with the Treasury or the individual agencies or to allow them to mature without replacement; (b) To buy U.S. Government securities, obligations that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the United States, from dealers for the account of the System Open Market Account under agreements for repurchase of such securities or obligations in 65 business days or less, at rates that, unless otherwise expressly authorized by the Committee, shall be determined by competitive bidding, after applying reasonable limitations on the volume of agreements with individual dealers. (c) To sell U.S. Government securities and obligations that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the United States to dealers for System Open Market Account under agreements for the resale by dealers of such securities or obligations in 65 business days or less, at rates that, unless otherwise expressly authorized by the Committee, shall be determined by competitive bidding, after applying reasonable limitations on the volume of agreements with individual dealers. 2. In order to ensure the effective conduct of open market operations, the Federal Open Market Committee authorizes the Federal Reserve Bank of New York to lend on an overnight basis U.S. Government securities held in the System Open Market Account to dealers at rates that shall be determined by competitive bidding. The Federal Reserve Bank of New York shall set a minimum lending fee consistent with the objectives of the program and apply reasonable limitations on the total amount of a specific issue that may be auctioned and on the amount of securities that each dealer may borrow. The Federal Reserve Bank of New York may reject bids which could facilitate a dealer's ability to control a single issue as determined solely by the Federal Reserve Bank of New York. 3. In order to ensure the effective conduct of open market operations, while assisting in the provision of short-term investments for foreign and international accounts maintained at the Federal Reserve Bank of New York and accounts maintained at the Federal Reserve Bank of New York as fiscal agent of the United States pursuant to Section 15 of the Federal Reserve Act, the Federal Open Market Committee authorizes and directs the Federal Reserve Bank of New York (a) for System Open Market Account, to sell U.S. Government securities to such accounts on the bases set forth in paragraph l(a) under agreements providing for the resale by such accounts of those securities in 65 business days or less on terms comparable to those available on such transactions in the market; and (b) for New York Bank account, when appropriate, to undertake with dealers, subject to the conditions imposed on purchases and sales of securities in paragraph l(b), repurchase agreements in U.S. Government and agency securities, and to arrange corresponding sale and repurchase agreements between its own account and such foreign, international, and fiscal agency accounts maintained at the Bank. Transactions undertaken with such accounts under the provisions of this paragraph may provide for a service fee when appropriate. 4. In the execution of the Committee's decision regarding policy during any intermeeting period, the Committee authorizes and directs the Federal Reserve Bank of New York, upon the instruction of the Chairman of the Committee, to adjust somewhat in exceptional circumstances the degree of pressure on reserve positions and hence the intended federal funds rate. Any such adjustment shall be made in the context of the Committee's discussion and decision at its most recent meeting and the Committee's long-run objectives for price stability and sustainable economic growth, and shall be based on economic, financial, and monetary developments during the intermeeting period. Consistent with Committee practice, the Chairman, if feasible, will consult with the Committee before making any adjustment. By unanimous vote, the Committee approved the Authorization for Foreign Currency Operations with an amendment to paragraph 1.D. regarding the maximum open position in all foreign currencies. Accordingly, the Authorization for Foreign Currency Operations was adopted, as shown below: AUTHORIZATION FOR FOREIGN CURRENCY OPERATIONS(Amended January 29, 2008) 1. The Federal Open Market Committee authorizes and directs the Federal Reserve Bank of New York, for System Open Market Account, to the extent necessary to carry out the Committee's foreign currency directive and express authorizations by the Committee pursuant thereto, and in conformity with such procedural instructions as the Committee may issue from time to time: A. To purchase and sell the following foreign currencies in the form of cable transfers through spot or forward transactions on the open market at home and abroad, including transactions with the U.S. Treasury, with the U.S. Exchange Stabilization Fund established by Section 10 of the Gold Reserve Act of 1934, with foreign monetary authorities, with the Bank for International Settlements, and with other international financial institutions: Canadian dollarsDanish kronerEuroPounds sterlingJapanese yenMexican pesosNorwegian kronerSwedish kronorSwiss francs B. To hold balances of, and to have outstanding forward contracts to receive or to deliver, the foreign currencies listed in paragraph A above. C. To draw foreign currencies and to permit foreign banks to draw dollars under the reciprocal currency arrangements listed in paragraph 2 below, provided that drawings by either party to any such arrangement shall be fully liquidated within 12 months after any amount outstanding at that time was first drawn, unless the Committee, because of exceptional circumstances, specifically authorizes a delay. D. To maintain an overall open position in all foreign currencies not exceeding $25.0 billion. For this purpose, the overall open position in all foreign currencies is defined as the sum (disregarding signs) of net positions in individual currencies, excluding changes in dollar value due to foreign exchange rate movements and interest accruals. The net position in a single foreign currency is defined as holdings of balances in that currency, plus outstanding contracts for future receipt, minus outstanding contracts for future delivery of that currency, i.e., as the sum of these elements with due regard to sign. 2. The Federal Open Market Committee directs the Federal Reserve Bank of New York to maintain reciprocal currency arrangements ("swap" arrangements) for the System Open Market Account for periods up to a maximum of 12 months with the following foreign banks, which are among those designated by the Board of Governors of the Federal Reserve System under Section 214.5 of Regulation N, Relations with Foreign Banks and Bankers, and with the approval of the Committee to renew such arrangements on maturity: Foreign bank Amount of arrangement(millions of dollars equivalent) Bank of Canada 2,000 Bank of Mexico 3,000 Any changes in the terms of existing swap arrangements, and the proposed terms of any new arrangements that may be authorized, shall be referred for review and approval to the Committee. 3. All transactions in foreign currencies undertaken under paragraph 1.A. above shall, unless otherwise expressly authorized by the Committee, be at prevailing market rates. For the purpose of providing an investment return on System holdings of foreign currencies or for the purpose of adjusting interest rates paid or received in connection with swap drawings, transactions with foreign central banks may be undertaken at non-market exchange rates. 4. It shall be the normal practice to arrange with foreign central banks for the coordination of foreign currency transactions. In making operating arrangements with foreign central banks on System holdings of foreign currencies, the Federal Reserve Bank of New York shall not commit itself to maintain any specific balance, unless authorized by the Federal Open Market Committee. Any agreements or understandings concerning the administration of the accounts maintained by the Federal Reserve Bank of New York with the foreign banks designated by the Board of Governors under Section 214.5 of Regulation N shall be referred for review and approval to the Committee. 5. Foreign currency holdings shall be invested to ensure that adequate liquidity is maintained to meet anticipated needs and so that each currency portfolio shall generally have an average duration of no more than 18 months (calculated as Macaulay duration). Such investments may include buying or selling outright obligations of, or fully guaranteed as to principal and interest by, a foreign government or agency thereof; buying such securities under agreements for repurchase of such securities; selling such securities under agreements for the resale of such securities; and holding various time and other deposit accounts at foreign institutions. In addition, when appropriate in connection with arrangements to provide investment facilities for foreign currency holdings, U.S. Government securities may be purchased from foreign central banks under agreements for repurchase of such securities within 30 calendar days. 6. All operations undertaken pursuant to the preceding paragraphs shall be reported promptly to the Foreign Currency Subcommittee and the Committee. The Foreign Currency Subcommittee consists of the Chairman and Vice Chairman of the Committee, the Vice Chairman of the Board of Governors, and such other member of the Board as the Chairman may designate (or in the absence of members of the Board serving on the Subcommittee, other Board members designated by the Chairman as alternates, and in the absence of the Vice Chairman of the Committee, his alternate). Meetings of the Subcommittee shall be called at the request of any member, or at the request of the Manager, System Open Market Account ("Manager"), for the purposes of reviewing recent or contemplated operations and of consulting with the Manager on other matters relating to his responsibilities. At the request of any member of the Subcommittee, questions arising from such reviews and consultations shall be referred for determination to the Federal Open Market Committee. 7. The Chairman is authorized: A. With the approval of the Committee, to enter into any needed agreement or understanding with the Secretary of the Treasury about the division of responsibility for foreign currency operations between the System and the Treasury; B. To keep the Secretary of the Treasury fully advised concerning System foreign currency operations, and to consult with the Secretary on policy matters relating to foreign currency operations; C. From time to time, to transmit appropriate reports and information to the National Advisory Council on International Monetary and Financial Policies. 8. Staff officers of the Committee are authorized to transmit pertinent information on System foreign currency operations to appropriate officials of the Treasury Department. 9. All Federal Reserve Banks shall participate in the foreign currency operations for System Account in accordance with paragraph 3G(1) of the Board of Governors' Statement of Procedure with Respect to Foreign Relationships of Federal Reserve Banks dated January 1, 1944. By unanimous vote, the Foreign Currency Directive was reaffirmed in the form shown below: FOREIGN CURRENCY DIRECTIVE(Reaffirmed January 29, 2008) 1. System operations in foreign currencies shall generally be directed at countering disorderly market conditions, provided that market exchange rates for the U.S. dollar reflect actions and behavior consistent with IMF Article IV, Section 1. 2. To achieve this end the System shall: A. Undertake spot and forward purchases and sales of foreign exchange. B. Maintain reciprocal currency ("swap") arrangements with selected foreign central banks. C. Cooperate in other respects with central banks of other countries and with international monetary institutions. 3. Transactions may also be undertaken: A. To adjust System balances in light of probable future needs for currencies. B. To provide means for meeting System and Treasury commitments in particular currencies, and to facilitate operations of the Exchange Stabilization Fund. C. For such other purposes as may be expressly authorized by the Committee. 4. System foreign currency operations shall be conducted: A. In close and continuous consultation and cooperation with the United States Treasury; B. In cooperation, as appropriate, with foreign monetary authorities; and C. In a manner consistent with the obligations of the United States in the International Monetary Fund regarding exchange arrangements under IMF Article IV. By unanimous vote, the Procedural Instructions with Respect to Foreign Currency Operations were reaffirmed in the form shown below: PROCEDURAL INSTRUCTIONS WITH RESPECT TO FOREIGN CURRENCY OPERATIONS(Reaffirmed January 29, 2008) In conducting operations pursuant to the authorization and direction of the Federal Open Market Committee as set forth in the Authorization for Foreign Currency Operations and the Foreign Currency Directive, the Federal Reserve Bank of New York, through the Manager, System Open Market Account ("Manager"), shall be guided by the following procedural understandings with respect to consultations and clearances with the Committee, the Foreign Currency Subcommittee, and the Chairman of the Committee. All operations undertaken pursuant to such clearances shall be reported promptly to the Committee. 1. The Manager shall clear with the Subcommittee (or with the Chairman, if the Chairman believes that consultation with the Subcommittee is not feasible in the time available): A. Any operation that would result in a change in the System's overall open position in foreign currencies exceeding $300 million on any day or $600 million since the most recent regular meeting of the Committee. B. Any operation that would result in a change on any day in the System's net position in a single foreign currency exceeding $150 million, or $300 million when the operation is associated with repayment of swap drawings. C. Any operation that might generate a substantial volume of trading in a particular currency by the System, even though the change in the System's net position in that currency might be less than the limits specified in 1.B. D. Any swap drawing proposed by a foreign bank not exceeding the larger of (i) $200 million or (ii) 15 percent of the size of the swap arrangement. 2. The Manager shall clear with the Committee (or with the Subcommittee, if the Subcommittee believes that consultation with the full Committee is not feasible in the time available, or with the Chairman, if the Chairman believes that consultation with the Subcommittee is not feasible in the time available): A. Any operation that would result in a change in the System's overall open position in foreign currencies exceeding $1.5 billion since the most recent regular meeting of the Committee. B. Any swap drawing proposed by a foreign bank exceeding the larger of (i) $200 million or (ii) 15 percent of the size of the swap arrangement. 3. The Manager shall also consult with the Subcommittee or the Chairman about proposed swap drawings by the System and about any operations that are not of a routine character. The Manager of the System Open Market Account reported on recent developments in foreign exchange markets. There were no open market operations in foreign currencies for the System's account in the period since the previous meeting. The Manager also reported on developments in domestic financial markets and on System open market operations in government securities and federal agency obligations during the period since the previous meeting. By unanimous vote, the Committee ratified these transactions. The information reviewed at the January meeting, which included the advance data on the national income and product accounts for the fourth quarter, indicated that economic activity had decelerated sharply in recent months. The contraction in homebuilding intensified in the fourth quarter, the growth in consumer spending slowed, and survey measures of both consumer and business sentiment were at low levels. In addition, industrial production contracted in the fourth quarter. Conditions in the labor market deteriorated noticeably, with private payroll employment posting a small decline in December and the unemployment rate rising. Readings on both headline and core inflation increased in recent months, although the twelve-month change in prices of core personal consumption expenditures in December was about the same as its year-earlier value. On average, private nonfarm payroll employment in November and December rose at only about half of the average pace seen from July to October. Over 2007 as a whole, the deterioration in labor demand was most pronounced in the construction and financial activities industries, which had been hardest hit by the difficulties in the housing and mortgage markets. Manufacturing employment declined yet again in December, while the decrease in employment in retail trade nearly reversed the sizable increase in that sector recorded in November. Aggregate hours of production or nonsupervisory workers were unchanged in December.  The unemployment rate rose to 5.0 percent in December after having been at or near 4.7 percent since September. Industrial production declined in the fourth quarter, as a drag from motor vehicles and construction-related industries more than offset a positive contribution from other industries. Output in high-tech industries moderated in the fourth quarter, largely because of a deceleration in production of computers and semiconductors. Utilities output climbed for a second consecutive quarter, and mining output was boosted by increases in natural gas extraction and in crude oil. The rise in real consumer spending moderated in the fourth quarter, with outlays on non-auto consumer goods increasing weakly. Spending on services rose solidly in November (the most recent month available), led by energy services and commissions paid to stockbrokers, but warmer-than-usual temperatures in December likely damped expenditures for energy services in that month. Sales of light motor vehicles were moderate during the fourth quarter. Real disposable personal income was little changed in the fourth quarter, held down by higher consumer energy prices. Also, the wealth-to-income ratio ticked down in the third quarter, and appeared likely to decline again in the fourth quarter, as equity prices had fallen since the end of the third quarter and available indicators pointed to continued declines in house prices in the fourth quarter. In December, readings on consumer sentiment remained at relatively low levels by historical standards. Both single-family housing starts and permit issuance fell in December. Meanwhile, multifamily housing starts plunged in December, but permit issuance pointed to a rebound in multifamily starts in the near term. New home sales dropped in November and December after having held relatively steady since August, keeping inventories of unsold homes at elevated levels. Sales of existing homes also moved down in December but, on balance, had declined less in recent months than sales of new homes. Demand for housing through the end of 2007 likely continued to be restrained by tight financing conditions for jumbo and nonprime mortgages. Real spending on equipment and software rose at a sluggish rate in the fourth quarter after having posted a solid increase in the third quarter. Sales of medium and heavy trucks edged up after falling to a four-year low. Spending on high-tech capital goods increased at a moderate pace over the second half of last year. Outside of the transportation and high-tech sectors, spending on equipment appeared to have declined last quarter after having posted sizable gains over the summer. Orders and shipments rose somewhat in the fourth quarter, but imports in the first two months of the quarter were below their average in the third quarter. Nonresidential construction remained vigorous in the fourth quarter. However, indicators of future spending in this sector pointed to a slowdown in coming months, with a decline in architectural billings, a rise in retail-sector vacancy rates, and survey reports that contractors were experiencing more difficulty in obtaining funding. More generally, surveys of business conditions and sentiment deteriorated and suggested that capital spending would be reduced in the near term. Real nonfarm inventory investment excluding motor vehicles appeared to have stepped up from its average rate over the first three quarters of 2007. In November, the ratio of manufacturing and trade book-value inventories (excluding motor vehicles) to sales ticked down. The U.S. international trade deficit widened slightly in October and then more substantially in November, as increases in imports in both months more than offset increases in exports. The increases in imports almost entirely reflected a jump in the value of imported oil. Non-oil goods imports were boosted by a large increase in imports of consumer goods and small increases in several other categories, which more than offset a steep decline in imports of non-oil industrial supplies. Imports of automotive products and capital goods recorded modest gains, with the increase in capital goods primarily reflecting a jump in imports of telecommunications equipment. Imports of services grew strongly. Exports in both months were boosted by higher exports of services. Exports of industrial supplies also recorded a strong gain, aided by a large increase in exports of fuels in November. Higher exports of semiconductors, aircraft, and machinery pushed up exports of capital goods, while exports of agricultural goods increased only slightly following a large jump in the third quarter. In contrast, exports of consumer goods fell from their third-quarter level. Economic growth in the advanced foreign economies appeared to have slowed in the fourth quarter, with recent data on household expenditures and retail sales weakening on balance and consumers and businesses considerably less upbeat about growth prospects. In Japan, the estimate of real GDP growth in the third quarter was revised down, and business sentiment declined in December amidst concerns about high oil prices. In the euro area, retail sales growth declined in October and November, and consumer and business surveys in November and December pointed to economic weakness. In the United Kingdom, although real GDP grew solidly in the fourth quarter, the estimate of third-quarter real GDP growth was revised down. In Canada, indicators suggested that growth in economic activity moderated in the fourth quarter. Private employment shrank in December after having posted very strong growth in November. Incoming data on emerging-market economies pointed, on balance, to a slowing of growth in the fourth quarter. Overall, growth in emerging Asia appeared to have moderated somewhat in the fourth quarter, with trade balances declining in several countries as exports slowed. Readings on economic activity in Latin America were more mixed. Incoming data suggested that growth slowed in Mexico in the fourth quarter. In Brazil , third-quarter growth was solid, but indicators for the fourth quarter were mixed. Economic activity appeared to be strong in Argentina in both the third and fourth quarters. In the United States, headline consumer price inflation stepped up noticeably in November and December from the low rates posted in the summer. Part of the increase reflected the rapid rise in energy prices, but prices of core personal consumption expenditures (PCE) also moved up faster in those months than they had earlier in the year. The pickup in core PCE inflation over the second half of 2007 reflected an acceleration in prices that had been unusually soft earlier in the year, such as prices for apparel, prescription drugs, and nonmarket services. For the year as a whole, core PCE prices increased at about the same rate as they had in 2006. Household survey measures of expectations for year-ahead inflation picked up in November and remained at that level in December and January. Households' longer-term inflation expectations rose in December but ticked down in January. Average hourly earnings increased faster in November and December than they had in October, although over the twelve months that ended in December, this wage measure rose a bit more slowly than the elevated pace posted in 2006. At its December meeting, the FOMC lowered its target for the federal funds rate 25 basis points, to 4-1/4 percent. In addition, the Board of Governors approved a decrease of 25 basis points in the discount rate, to 4-3/4 percent, leaving the gap between the federal funds rate target and the discount rate at 50 basis points. The Committee's statement noted that incoming information suggested that economic growth was slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending. Moreover, strains in financial markets had increased in recent weeks. The Committee indicated that its action, combined with the policy actions taken earlier, should help promote moderate growth over time. Readings on core inflation had improved modestly during the year, but elevated energy and commodity prices, among other factors, might put upward pressure on inflation. In this context, the Committee judged that some inflation risk remained and said that it would continue to monitor inflation developments carefully. Recent developments, including the deterioration in financial market conditions, had increased the uncertainty surrounding the outlook for economic growth and inflation. The Committee stated that it would continue to assess the effects of financial and other developments on economic prospects and would act as needed to foster price stability and sustainable economic growth. Over the intermeeting period, the expected path of monetary policy over the next year as measured by money market futures rates tilted down sharply, primarily in response to softer-than-expected economic data releases. The Committee's action at its December meeting was largely anticipated by market participants, although some investors were surprised by the absence of any indication of accompanying measures to address strains in term funding markets. Some of that surprise was reversed the next day, following the announcement of a Term Auction Facility (TAF) and associated swap lines with the European Central Bank and the Swiss National Bank. The subsequent release of the minutes of the meeting elicited little market reaction. However, investors did mark down the expected path of policy in response to speeches by Federal Reserve officials; the speeches were interpreted as suggesting that signs of broader economic weakness and additional financial strains would likely require an easier stance of policy. The Committee's decision to reduce the target federal funds rate 75 basis points on January 22 surprised market participants and led investors to mark down further the path of policy over the next few months. Consistent with the shift in the economic outlook, the revision in policy expectations, and the reduction in the target federal funds rate, yields on nominal Treasury coupon securities declined substantially over the period since the December FOMC meeting. The yield curve steepened somewhat further, with the two-year yield dropping more than the ten-year yield. Near-term inflation compensation increased in early January amid rising oil prices, but it retreated in later weeks, along with oil prices, and declined, on net, over the period. Conditions in short-term funding markets improved notably over the intermeeting period, but strains remained. Spreads of rates on securities in interbank funding markets over risk-free rates narrowed somewhat following the announcement of the TAF on December 12 and eased considerably after year-end, although they remained at somewhat elevated levels. Spreads of rates on asset-backed commercial paper over risk-free rates also fell, on net, and the level of such paper outstanding increased in the first two weeks of January for the first time since August. In longer-term corporate markets, yields on investment-grade corporate bonds fell less than those on comparable-maturity Treasury securities, while yields on speculative-grade bonds rose considerably. As a result, corporate bond spreads climbed to their highest levels since early 2003, apparently reflecting increased concern among investors about the outlook for corporate credit quality over the next few years. Nonetheless, gross bond issuance in December remained strong. Commercial bank credit expanded briskly in December, supported by robust growth in business loans and in nonmortgage loans to households, and in the face of survey reports of tighter lending conditions. Over the intermeeting period, spreads on conforming mortgages over comparable-maturity Treasury securities remained about flat, as did spreads on jumbo mortgages, although credit availability for jumbo-mortgage borrowers continued to be tight. Broad stock price indexes fell over the intermeeting period on perceptions of a deteriorating economic outlook and additional write-downs by financial institutions. Similar stresses were again evident in the financial markets of major foreign economies. The trade-weighted foreign exchange value of the dollar against major currencies declined slightly, on balance, over the intermeeting period. Debt in the domestic nonfinancial sector was estimated to have increased somewhat more slowly in the fourth quarter than in the third. The rate of increase of nonfinancial business debt decelerated in the fourth quarter from its rapid third-quarter pace despite robust bond issuance as the rise in commercial and industrial lending moderated. Household mortgage debt expanded at a slow rate in the fourth quarter, reflecting continued weakness in home prices, declining home sales, and tighter credit conditions for some borrowers. Nonmortgage consumer credit appeared to expand at a moderate pace. In December, the increase in M2 was up slightly from its November pace, boosted primarily by inflows into the relative safety and liquidity of money market mutual funds. The rise in small time deposits moderated but remained elevated, as several thrift institutions offered attractive deposit rates to secure funding. In contrast, liquid deposits continued to increase weakly and currency contracted noticeably, the latter apparently reflecting an ongoing trend in overseas demand away from U.S. dollar bank notes and towards the euro and other currencies. In the forecast prepared for this meeting, the staff revised up slightly its estimated increase in aggregate economic activity in the fourth quarter of 2007 but revised down its projected increase for the first half of 2008. Although data on consumer spending and nonresidential construction activity for the fourth quarter had come in above the staff's expectations, most of the information received over the intermeeting period was weaker than had been previously expected. The drop in housing activity continued to intensify, conditions in labor markets appeared to have deteriorated noticeably near year-end, and factory output had weakened. Consumer confidence remained low, and indicators of business sentiment had worsened. Equity prices had also fallen sharply so far in 2008, and, while the functioning of money markets had improved, conditions in some other financial markets had become more restrictive. The staff projection showed the weakness in spending dissipating over the second half of 2008 and 2009, in response to the cumulative easing of monetary policy since August, the abatement of housing weakness, a lessening drag from high oil prices, and the prospect of fiscal stimulus. Still, projected resource utilization was lower over the next two years than in the previous forecast. The projection for core PCE price inflation in 2008 was raised slightly in response to elevated readings in recent months. The forecast for headline PCE price inflation also incorporated a somewhat higher rate of increase for energy prices for the first half of 2008; as a result, headline PCE price inflation was now expected to exceed core PCE price inflation slightly for that year. The forecasts for both headline and core PCE price inflation for 2009 were unchanged, with both receding from their 2008 levels. In conjunction with the FOMC meeting in January, all meeting participants (Federal Reserve Board members and Reserve Bank presidents) provided annual projections for economic growth, unemployment, and inflation for the period 2008 through 2010. The projections are described in the Summary of Economic Projections, which is attached as an addendum to these minutes. In their discussion of the economic situation and outlook, and in the projections that they had submitted for this meeting, participants noted that information received since the December meeting had been decidedly downbeat on balance. In particular, the drop in housing activity had intensified, factory output had weakened, news on business investment had been soft, and conditions in labor markets appeared to have deteriorated. In addition, consumer confidence had remained low and business confidence appeared to have worsened. Although the functioning of money markets had improved notably, strains remained evident in a number of other financial markets, and credit conditions had become generally more restrictive. Against this backdrop, participants expected economic growth to remain weak in the first half of this year before picking up in the second half, aided in part by a more accommodative stance of monetary policy and by likely fiscal stimulus. Further ahead, participants judged that economic growth would continue to pick up gradually in 2009 and 2010. Nonetheless, with housing activity and house prices still declining and with financial conditions for businesses and households tightening further, significant uncertainties surrounded this outlook and the risks to economic growth in the near term appeared to be weighted to the downside. Indeed, several participants noted that the risks of a downturn in the economy were significant. Inflation data had been disappointing in recent months, and a few participants cited anecdotal reports that some firms were able to pass on costs to consumers. However, with inflation expectations anticipated to remain reasonably well anchored, energy and other commodity prices expected to flatten out, and pressures on resources likely to ease, participants generally expected inflation to moderate somewhat in coming quarters. Meeting participants observed that conditions in short-term funding markets had improved considerably since the December meeting, reflecting the easing of pressures related to funding around the turn of the year as well as the implementation of the TAF. However, broader financial conditions had tightened significantly, on balance, in the weeks leading up to the meeting, as evidence of further deterioration in housing markets and investors' more pessimistic view of the economic outlook adversely affected a range of financial markets. Many participants were concerned that the drop in equity prices, coupled with the ongoing decline in house prices, implied reductions in household wealth that would likely damp consumer spending. Moreover, elevated volatility in financial markets likely reflected increased uncertainty about the economic outlook, and that greater uncertainty could lead firms and households to limit spending. The availability of credit to consumers and businesses appeared to be tightening, likely adding to restraint on economic growth. Participants discussed the risks to financial markets and institutions posed by possible further deterioration in the condition of financial guarantors, and many perceived a possibility that additional downgrades in these firms' credit ratings could put increased strains on financial markets. To be sure, some positive financial developments were evident. Banks appeared to be making some progress in strengthening their balance sheets, with several financial institutions able to raise significant amounts of capital to offset the large losses they had suffered in recent quarters. Nevertheless, participants generally viewed financial markets as still vulnerable to additional economic and credit weakness. Some noted the especially worrisome possibility of an adverse feedback loop, that is, a situation in which a tightening of credit conditions could depress investment and consumer spending, which, in turn, could feed back to a further tightening of credit conditions. In their discussion of individual sectors of the economy, meeting participants emphasized that activity in housing markets had continued to deteriorate sharply. With single-family permits and starts still falling, sales of new homes dropping precipitously, sales of existing homes flat, and inventories of unsold homes remaining elevated even in the face of falling house prices, several participants noted the absence of signs of stabilization in the sector. Of further concern were the reduced availability of nonconforming loans and the apparent tightening by banks of credit standards on mortgages, both of which had the potential for intensifying the housing contraction. The recent declines in interest rates had spurred a surge in applications for mortgage refinancing and would limit the upward resets on the rates on outstanding adjustable-rate mortgages, both of which would tend to improve some households' finances. Nonetheless, participants viewed the housing situation and its potential further effect on employment, income, and wealth as one of the major sources of downside risk to the economic outlook. Recent data as well as anecdotal information indicated that consumer spending had decelerated considerably, perhaps partly reflecting a spillover from the weakness in the housing sector. Participants remarked that declining house prices and sales appeared to be depressing consumer sentiment and that the contraction in wealth associated with decreases in home and equity prices probably was restraining spending. In addition, consumption expenditures were being damped by slower growth in real disposable income induced by high energy prices and possibly by a softening of the labor market. The December employment report showed that job growth had slowed appreciably, and other indicators also pointed to emerging weakness in the labor market in the intermeeting period. And spending in the future could be affected by an ongoing tightening in the availability of consumer credit amid signs that lenders were becoming increasingly cautious in view of some deterioration of credit performance on consumer loans and widening expectations of slower income growth. Some participants, however, cited evidence that workers in some sectors were still in short supply and saw signs that the labor market remained resilient. The outlook for business investment had turned weaker as well since the time of the December meeting. Several participants reported that firms in their districts were reducing capital expenditures in anticipation of a slowing in sales. Manufacturing activity appeared to have slowed or contracted in many districts. Although a few participants reported more upbeat attitudes among firms in the technology and energy sectors, business sentiment overall appeared to be declining. Moreover, a number of indicators pointed to a tightening in credit availability to businesses. For example, the Senior Loan Officer Opinion Survey on Bank Lending Practices indicated that banks had tightened lending standards and pricing terms on business loans. Lending standards had been raised especially sharply on commercial real estate loans. While real outlays for nonresidential construction apparently continued to rise through the fourth quarter, anecdotal evidence pointed to a weakening of commercial real estate spending in several districts, with some projects being canceled or scaled back. Most participants anticipated that a fiscal stimulus package, including tax rebates for households and bonus depreciation allowances for businesses, would be enacted before long and would support economic growth in the second half of the year. Some pointed out, however, that the fiscal stimulus package might not help in the near term, when the risks of a downturn in economic activity appeared largest. In addition, the effects of the proposed package would likely be temporary, with the stimulus reversing in 2009. With regard to the external sector, some participants noted that growth abroad had recently been strong and that increasing U.S. exports had been a significant source of strength for the U.S. economy of late. However, available data suggested that economic activity outside the United States appeared to be decelerating somewhat. Although slowing foreign growth would reduce a source of support for the U.S. economy at the same time that domestic spending was slackening, it could also damp commodity prices and help reduce global price pressures. Participants agreed that the inflation data that were received since the December meeting had been disappointing. But many believed that the slow growth in economic activity anticipated for the first half of this year and the associated slack in resource utilization would contribute to an easing of price pressures. Moreover, a leveling-off of energy and commodity prices such as that embedded in futures markets would also help moderate inflation pressures. However, some participants cautioned that commodity prices had remained stubbornly high for quite some time and that inferences drawn in the past from futures markets about likely trends in such prices had often proven inaccurate. Participants also related anecdotal evidence of firms facing increasing input cost pressures and in some cases being able to pass on those costs to consumers. Moreover, headline inflation had been generally above 2 percent over the past four years, and participants noted that such persistently elevated readings could ultimately affect inflation expectations. Some survey measures of inflation expectations had edged up in recent months, and longer-term financial market gauges of inflation compensation had climbed. The latter probably reflected at least in part increased uncertainty--inflation risk--rather than greater inflation expectations; increases in nominal wages did not appear to be incorporating higher inflation expectations. On balance, expectations seemed to remain fairly well anchored, but participants agreed that continued stability of inflation expectations was essential. In the discussion of monetary policy for the intermeeting period, most members believed that a further significant easing in policy was warranted at this meeting to address the considerable worsening of the economic outlook since December as well as increased downside risks. As had been the case in some previous cyclical episodes, a relatively low real federal funds rate now appeared appropriate for a time to counter the factors that were restraining economic growth, including the slide in housing activity and prices, the tightening of credit availability, and the drop in equity prices. Members judged that a 50 basis point reduction in the federal funds rate, together with the Committee's previous policy actions, would bring the real short-term rate to a level that was likely to help the economy expand at a moderate pace over time. Still, with no signs of stabilization in the housing sector and with financial conditions not yet stabilized, the Committee agreed that downside risks to growth would remain even after this action. Members were also mindful of the need for policy to promote price stability, and some noted that, when prospects for growth had improved, a reversal of a portion of the recent easing actions, possibly even a rapid reversal, might be appropriate. However, most members agreed that a 50 basis point easing at this meeting would likely not contribute to an increase in inflation pressures given the actual and expected weakness in economic growth and the consequent reduction in pressures on resources. Rather, members agreed that inflation was likely to moderate in coming quarters, but they also concurred that it would be necessary to continue to monitor inflation developments carefully. The Committee agreed that the statement to be released after the meeting should indicate that financial markets remained under considerable stress, that credit had tightened further for some businesses and households, and that recent information pointed to a deepening of the housing contraction as well as to some softening in labor markets. The Committee again viewed it as appropriate to indicate that it expected inflation to moderate in coming quarters but also to emphasize that it would be necessary to monitor inflation developments carefully. The action taken at the meeting, combined with the cumulative policy easing already in place, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, members concurred that downside risks to growth remained, and that the Committee would continue to assess the effects of financial and other developments on economic prospects and would act in a timely manner as needed to address those risks. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: “The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output.  To further its long-run objectives, the Committee in the immediate future seeks conditions in reserve markets consistent with reducing the federal funds rate to an average of around 3 percent.” The vote encompassed approval of the statement below to be released at 2:15 p.m.: “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.” Votes for this action: Messrs. Bernanke, Geithner, Kohn, Kroszner, and Mishkin, Ms. Pianalto, Messrs. Plosser, Stern, and Warsh. Votes against this action: Mr. Fisher. Mr. Fisher dissented because he preferred to leave the federal funds rate unchanged. The rate had been lowered by 75 basis points just one week earlier in a decision he supported, which brought the funds rate down 175 basis points since September. Given these actions, he felt that monetary policy was already quite stimulative, while headline inflation was too high at more than 3 percent over the last year. Demand-pull inflation pressures from emerging-market economies abroad appeared to be continuing, and anecdotal reports from business contacts suggested greater willingness domestically to pass rising costs through to prices. Moreover, Mr. Fisher was concerned that inflation expectations could become unanchored if the perception of negative real rates of interest were to become pervasive. At the same time, the economy appeared to be still growing, albeit at a substantially weakened pace. Given the policy tradeoffs confronting the FOMC at this time, Mr. Fisher saw the upside risks to inflation as being greater than the downside risks to longer-term economic growth, especially in light of the recent, aggressive easing of monetary policy and the lag before it would have its full effect on the economy. The Committee then turned to a discussion of selected longer-term regulatory and structural issues raised by recent financial market developments. A staff presentation began by noting that the difficulties in financial markets started with unexpectedly heavy losses on subprime mortgages and related structured securities, which led investors to question the valuations of complex structured instruments more generally and to pull back from such investments. The resulting effects in markets put pressure on some large banking organizations, particularly through losses on subprime-mortgage-related securities and other assets, and through the unplanned expansion of balance sheets triggered by the disruption of various markets in which assets were securitized. The remainder of the presentation, and the discussion by meeting participants, focused on two issues: first, the important role of credit ratings in the securitization process, including the methods used to set ratings and the way investors use ratings in making their investment decisions; and second, how weaknesses in risk management practices at some large global financial services organizations appear to have led to outsized losses at those institutions, and the reasons that such weaknesses may have emerged at some firms and not at others. It was agreed that the next meeting of the Committee would be held on Tuesday, March 18, 2008. The meeting adjourned at 1:15 p.m. Notation VoteBy notation vote completed on December 31, 2007, the Committee unanimously approved the minutes of the FOMC meeting held on December 11, 2007. Conference CallsOn January 9, 2008, the Committee reviewed recent economic data and financial market developments. The available information suggested that the downside risks to growth had increased significantly since the time of the December FOMC meeting. Participants discussed the possibility that the slowing in economic growth and associated softening in labor markets might exacerbate the tightening in credit conditions and the correction in housing market activity and prices, which could in turn weigh further on economic activity. Participants emphasized the risks that such adverse dynamics could pose to economic and financial stability. Participants noted that core price inflation had edged up in recent months, boosted in part by the pass-through of higher energy costs to the prices of core consumer goods and services. Inflation was expected to edge lower this year as energy prices leveled off and pressures on resources eased. However, this slowing in inflation was dependent on inflation expectations remaining well anchored, and participants noted that considerable uncertainty surrounded the inflation outlook. Most participants were of the view that substantial additional policy easing in the near term might well be necessary to promote moderate economic growth over time and to reduce the downside risks to growth, and participants discussed the possible timing of such policy actions. On January 21, 2008, the Committee again met by conference call. Incoming information since the conference call on January 9 had reinforced the view that the outlook for economic activity was weakening. Among other developments, strains in some financial markets had intensified, as it appeared that investors were becoming increasingly concerned about the economic outlook and the downside risks to activity. Participants discussed the possibility that these developments could lead to an excessive pull-back in credit availability and in investment. Although inflation was expected to moderate from recent elevated levels, participants stressed that this outlook relied upon inflation expectations remaining well anchored and that the inflation situation should continue to be monitored carefully. All members judged that a substantial easing in policy in the near term was appropriate to foster moderate economic growth and reduce the downside risks to economic activity. Most members judged that an immediate reduction in the federal funds rate was called for to begin aligning the real policy rate with a weakening economic situation. Such an action, by demonstrating the Committee's commitment to act decisively to support economic activity, might reduce concerns about economic prospects that seemed to be contributing to the deteriorating conditions in financial markets, which could feed back on the economy. However, some concern was expressed that an immediate policy action could be misinterpreted as directed at recent declines in stock prices, rather than the broader economic outlook, and one member believed it preferable to delay policy action until the scheduled FOMC meeting on January 29-30. Some members also noted that were policy to become very stimulative it would be important for the Committee to be decisive in reversing the course of interest rates once the economy had strengthened and downside risks had abated. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee in the immediate future seeks conditions in reserve markets consistent with reducing the federal funds rate to an average of around 3-1/2 percent." The vote encompassed approval of the text below for inclusion in the statement to be released at 8:30 a.m. on Tuesday, January 22: “The Federal Open Market Committee has decided to lower its target for the federal funds rate 75 basis points to 3-1/2 percent. The Committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth. While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming 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. Appreciable 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.” Votes for this action: Messrs. Bernanke, Geithner, Evans, Hoenig, Kohn, Kroszner, Rosengren, and Warsh. Votes against this action: Mr. Poole Absent and not voting: Mr. Mishkin Mr. Poole dissented because he did not believe that current conditions justified policy action before the regularly scheduled meeting the following week. _____________________________ Brian F. MadiganSecretary Return to top

2008-01-30

Statement

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.

2008-01-21

Statement

The Federal Open Market Committee has decided to lower its target for the federal funds rate 75 basis points to 3-1/2 percent. The Committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth.  While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households.  Moreover, incoming 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. Appreciable 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; Charles L. Evans; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Eric S. Rosengren; and Kevin M. Warsh.  Voting against was William Poole, who did not believe that current conditions justified policy action before the regularly scheduled meeting next week. Absent and not voting was Frederic S. Mishkin. In a related action, the Board of Governors approved a 75-basis-point decrease in the discount rate to 4 percent.  In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Chicago and Minneapolis.

N/A

Minute

A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, January 29, 2008 at 2:00 p.m. and continued on Wednesday, January 30, 2008 at 9:00 a.m. Present:Mr. Bernanke, ChairmanMr. Geithner, Vice ChairmanMr. FisherMr. KohnMr. KrosznerMr. MishkinMs. PianaltoMr. PlosserMr. SternMr. Warsh Messrs. Evans, Lacker, and Lockhart, and Ms. Yellen, Alternate Members of the Federal Open Market Committee Messrs. Hoenig, Poole, and Rosengren, Presidents of the Federal Reserve Banks of Kansas City, St. Louis, and Boston, respectively Mr. Madigan, Secretary and EconomistMs. Danker, Deputy SecretaryMr. Skidmore, Assistant SecretaryMs. Smith, Assistant SecretaryMr. Alvarez, General CounselMr. Baxter, Deputy General CounselMr. Sheets, EconomistMr. Stockton, Economist Messrs. Connors, English, and Kamin, Ms. Mester, Messrs. Rosenblum, Slifman, Sniderman, Tracy, and Wilcox, Associate Economists Mr. Dudley, Manager, System Open Market Account Mr. Struckmeyer,1 Deputy Staff Director, Office of Staff Director for Management, Board of Governors Mr. Parkinson,2 Deputy Director, Division of Research and Statistics, Board of Governors Mr. Clouse, Senior Associate Director, Division of Monetary Affairs, Board of Governors Ms. Liang and Messrs. Reifschneider and Wascher, Associate Directors, Division of Research and Statistics, Board of Governors Ms. Barger2 and Mr. Greenlee,2 Associate Directors, Division of Banking Supervision and Regulation, Board of Governors Mr. Gibson,2 Deputy Associate Director, Division of Research and Statistics, Board of Governors Mr. Dale, Senior Adviser, Division of Monetary Affairs, Board of Governors Mr. Oliner, Senior Adviser, Division of Research and Statistics, Board of Governors Messrs. Durham and Perli, Assistant Directors, Division of Monetary Affairs, Board of Governors Mr. Blanchard, Assistant to the Board, Office of Board Members, Board of Governors Mr. Small, Project Manager, Division of Monetary Affairs, Board of Governors Mr. Bassett,3 Senior Economist, Division of Monetary Affairs, Board of Governors Mr. Doyle,3 Senior Economist, Division of International Finance, Board of Governors Ms. Kusko, 3 Senior Economist, Division of Research and Statistics, Board of Governors Mr. Luecke, Senior Financial Analyst, Division of Monetary Affairs, Board of Governors Mr. Driscoll, Economist, Division of Monetary Affairs, Board of Governors Ms. Low, Open Market Secretariat Specialist, Division of Monetary Affairs, Board of Governors Ms. Green, First Vice President, Federal Reserve Bank of Richmond Messrs. Fuhrer and Judd, Executive Vice Presidents, Federal Reserve Banks of Boston and San Francisco, respectively Messrs. Altig and Angulo,2 Mses. Hirtle2 and Mosser, Messrs. Peters2 and Rasche, Senior Vice Presidents, Federal Reserve Banks of Atlanta, New York, New York, New York, New York, and St. Louis, respectively Mr. Hakkio, Senior Adviser, Federal Reserve Bank of Kansas City Mr. Krane, Vice President, Federal Reserve Bank of Chicago Mr. Weber, Senior Research Officer, Federal Reserve Bank of Minneapolis 1. Attended Wednesday's session. Return to text2. Attended portion of the meeting relating to the analysis of policy issues raised by financial market developments. Return to text3. Attended portion of the meeting relating to the economic outlook and monetary policy decision. Return to text In the agenda for this meeting, it was reported that advices of the election of the following members and alternate members of the Federal Open Market Committee for a term beginning January 29, 2008 had been received and that these individuals had executed their oaths of office. The elected members and alternate members were as follows: Timothy F. Geithner, President of the Federal Reserve Bank of New York, with Christine M. Cumming, First Vice President of the Federal Reserve Bank of New York, as alternate. Charles I. Plosser, President of the Federal Reserve Bank of Philadelphia, with Jeffrey M. Lacker, President of the Federal Reserve Bank of Richmond, as alternate. Sandra Pianalto, President of the Federal Reserve Bank of Cleveland, with Charles L. Evans, President of the Federal Reserve Bank of Chicago, as alternate. Richard W. Fisher, President of the Federal Reserve Bank of Dallas, with Dennis P. Lockhart, President of the Federal Reserve Bank of Atlanta, as alternate. Gary H. Stern, President of the Federal Reserve Bank of Minneapolis, with Janet L. Yellen, President of the Federal Reserve Bank of San Francisco, as alternate. By unanimous vote, the following officers of the Federal Open Market Committee were selected to serve until the selection of their successors at the first regularly scheduled meeting of the Committee in 2009: Ben S. Bernanke Chairman Timothy F. Geithner Vice Chairman Brian F. Madigan Secretary and Economist Deborah J. Danker Deputy Secretary David W. Skidmore Assistant Secretary Michelle A. Smith Assistant Secretary Scott G. Alvarez General Counsel Thomas C. Baxter, Jr. Deputy General Counsel Richard M. Ashton Assistant General Counsel D. Nathan Sheets Economist David J. Stockton Economist   Thomas A. Connors William B. English Steven B. Kamin Loretta J. Mester Arthur J. Rolnick Harvey Rosenblum Lawrence Slifman Mark S. Sniderman Joseph S. Tracy David W. Wilcox Associate Economists By unanimous vote, the Committee made a few amendments to its rules and to the Program for Security of FOMC Information. The amendments primarily addressed the Committee's practice of approving the minutes via notation vote, attendance at Committee meetings, and access to Committee information by System employees. By unanimous vote, the Federal Reserve Bank of New York was selected to execute transactions for the System Open Market Account. By unanimous vote, William C. Dudley was selected to serve at the pleasure of the Committee as Manager, System Open Market Account, on the understanding that his selection was subject to being satisfactory to the Federal Reserve Bank of New York. By unanimous vote, the Authorization for Domestic Open Market Operations was reaffirmed in the form shown below: AUTHORIZATION FOR DOMESTIC OPEN MARKET OPERATIONS(Reaffirmed January 29, 2008) 1. The Federal Open Market Committee authorizes and directs the Federal Reserve Bank of New York, to the extent necessary to carry out the most recent domestic policy directive adopted at a meeting of the Committee: (a) To buy or sell U.S. Government securities, including securities of the Federal Financing Bank, and securities that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the United States in the open market, from or to securities dealers and foreign and international accounts maintained at the Federal Reserve Bank of New York, on a cash, regular, or deferred delivery basis, for the System Open Market Account at market prices, and, for such Account, to exchange maturing U.S. Government and Federal agency securities with the Treasury or the individual agencies or to allow them to mature without replacement; (b) To buy U.S. Government securities, obligations that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the United States, from dealers for the account of the System Open Market Account under agreements for repurchase of such securities or obligations in 65 business days or less, at rates that, unless otherwise expressly authorized by the Committee, shall be determined by competitive bidding, after applying reasonable limitations on the volume of agreements with individual dealers. (c) To sell U.S. Government securities and obligations that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the United States to dealers for System Open Market Account under agreements for the resale by dealers of such securities or obligations in 65 business days or less, at rates that, unless otherwise expressly authorized by the Committee, shall be determined by competitive bidding, after applying reasonable limitations on the volume of agreements with individual dealers. 2. In order to ensure the effective conduct of open market operations, the Federal Open Market Committee authorizes the Federal Reserve Bank of New York to lend on an overnight basis U.S. Government securities held in the System Open Market Account to dealers at rates that shall be determined by competitive bidding. The Federal Reserve Bank of New York shall set a minimum lending fee consistent with the objectives of the program and apply reasonable limitations on the total amount of a specific issue that may be auctioned and on the amount of securities that each dealer may borrow. The Federal Reserve Bank of New York may reject bids which could facilitate a dealer's ability to control a single issue as determined solely by the Federal Reserve Bank of New York. 3. In order to ensure the effective conduct of open market operations, while assisting in the provision of short-term investments for foreign and international accounts maintained at the Federal Reserve Bank of New York and accounts maintained at the Federal Reserve Bank of New York as fiscal agent of the United States pursuant to Section 15 of the Federal Reserve Act, the Federal Open Market Committee authorizes and directs the Federal Reserve Bank of New York (a) for System Open Market Account, to sell U.S. Government securities to such accounts on the bases set forth in paragraph l(a) under agreements providing for the resale by such accounts of those securities in 65 business days or less on terms comparable to those available on such transactions in the market; and (b) for New York Bank account, when appropriate, to undertake with dealers, subject to the conditions imposed on purchases and sales of securities in paragraph l(b), repurchase agreements in U.S. Government and agency securities, and to arrange corresponding sale and repurchase agreements between its own account and such foreign, international, and fiscal agency accounts maintained at the Bank. Transactions undertaken with such accounts under the provisions of this paragraph may provide for a service fee when appropriate. 4. In the execution of the Committee's decision regarding policy during any intermeeting period, the Committee authorizes and directs the Federal Reserve Bank of New York, upon the instruction of the Chairman of the Committee, to adjust somewhat in exceptional circumstances the degree of pressure on reserve positions and hence the intended federal funds rate. Any such adjustment shall be made in the context of the Committee's discussion and decision at its most recent meeting and the Committee's long-run objectives for price stability and sustainable economic growth, and shall be based on economic, financial, and monetary developments during the intermeeting period. Consistent with Committee practice, the Chairman, if feasible, will consult with the Committee before making any adjustment. By unanimous vote, the Committee approved the Authorization for Foreign Currency Operations with an amendment to paragraph 1.D. regarding the maximum open position in all foreign currencies. Accordingly, the Authorization for Foreign Currency Operations was adopted, as shown below: AUTHORIZATION FOR FOREIGN CURRENCY OPERATIONS(Amended January 29, 2008) 1. The Federal Open Market Committee authorizes and directs the Federal Reserve Bank of New York, for System Open Market Account, to the extent necessary to carry out the Committee's foreign currency directive and express authorizations by the Committee pursuant thereto, and in conformity with such procedural instructions as the Committee may issue from time to time: A. To purchase and sell the following foreign currencies in the form of cable transfers through spot or forward transactions on the open market at home and abroad, including transactions with the U.S. Treasury, with the U.S. Exchange Stabilization Fund established by Section 10 of the Gold Reserve Act of 1934, with foreign monetary authorities, with the Bank for International Settlements, and with other international financial institutions: Canadian dollarsDanish kronerEuroPounds sterlingJapanese yenMexican pesosNorwegian kronerSwedish kronorSwiss francs B. To hold balances of, and to have outstanding forward contracts to receive or to deliver, the foreign currencies listed in paragraph A above. C. To draw foreign currencies and to permit foreign banks to draw dollars under the reciprocal currency arrangements listed in paragraph 2 below, provided that drawings by either party to any such arrangement shall be fully liquidated within 12 months after any amount outstanding at that time was first drawn, unless the Committee, because of exceptional circumstances, specifically authorizes a delay. D. To maintain an overall open position in all foreign currencies not exceeding $25.0 billion. For this purpose, the overall open position in all foreign currencies is defined as the sum (disregarding signs) of net positions in individual currencies, excluding changes in dollar value due to foreign exchange rate movements and interest accruals. The net position in a single foreign currency is defined as holdings of balances in that currency, plus outstanding contracts for future receipt, minus outstanding contracts for future delivery of that currency, i.e., as the sum of these elements with due regard to sign. 2. The Federal Open Market Committee directs the Federal Reserve Bank of New York to maintain reciprocal currency arrangements ("swap" arrangements) for the System Open Market Account for periods up to a maximum of 12 months with the following foreign banks, which are among those designated by the Board of Governors of the Federal Reserve System under Section 214.5 of Regulation N, Relations with Foreign Banks and Bankers, and with the approval of the Committee to renew such arrangements on maturity: Foreign bank Amount of arrangement(millions of dollars equivalent) Bank of Canada 2,000 Bank of Mexico 3,000 Any changes in the terms of existing swap arrangements, and the proposed terms of any new arrangements that may be authorized, shall be referred for review and approval to the Committee. 3. All transactions in foreign currencies undertaken under paragraph 1.A. above shall, unless otherwise expressly authorized by the Committee, be at prevailing market rates. For the purpose of providing an investment return on System holdings of foreign currencies or for the purpose of adjusting interest rates paid or received in connection with swap drawings, transactions with foreign central banks may be undertaken at non-market exchange rates. 4. It shall be the normal practice to arrange with foreign central banks for the coordination of foreign currency transactions. In making operating arrangements with foreign central banks on System holdings of foreign currencies, the Federal Reserve Bank of New York shall not commit itself to maintain any specific balance, unless authorized by the Federal Open Market Committee. Any agreements or understandings concerning the administration of the accounts maintained by the Federal Reserve Bank of New York with the foreign banks designated by the Board of Governors under Section 214.5 of Regulation N shall be referred for review and approval to the Committee. 5. Foreign currency holdings shall be invested to ensure that adequate liquidity is maintained to meet anticipated needs and so that each currency portfolio shall generally have an average duration of no more than 18 months (calculated as Macaulay duration). Such investments may include buying or selling outright obligations of, or fully guaranteed as to principal and interest by, a foreign government or agency thereof; buying such securities under agreements for repurchase of such securities; selling such securities under agreements for the resale of such securities; and holding various time and other deposit accounts at foreign institutions. In addition, when appropriate in connection with arrangements to provide investment facilities for foreign currency holdings, U.S. Government securities may be purchased from foreign central banks under agreements for repurchase of such securities within 30 calendar days. 6. All operations undertaken pursuant to the preceding paragraphs shall be reported promptly to the Foreign Currency Subcommittee and the Committee. The Foreign Currency Subcommittee consists of the Chairman and Vice Chairman of the Committee, the Vice Chairman of the Board of Governors, and such other member of the Board as the Chairman may designate (or in the absence of members of the Board serving on the Subcommittee, other Board members designated by the Chairman as alternates, and in the absence of the Vice Chairman of the Committee, his alternate). Meetings of the Subcommittee shall be called at the request of any member, or at the request of the Manager, System Open Market Account ("Manager"), for the purposes of reviewing recent or contemplated operations and of consulting with the Manager on other matters relating to his responsibilities. At the request of any member of the Subcommittee, questions arising from such reviews and consultations shall be referred for determination to the Federal Open Market Committee. 7. The Chairman is authorized: A. With the approval of the Committee, to enter into any needed agreement or understanding with the Secretary of the Treasury about the division of responsibility for foreign currency operations between the System and the Treasury; B. To keep the Secretary of the Treasury fully advised concerning System foreign currency operations, and to consult with the Secretary on policy matters relating to foreign currency operations; C. From time to time, to transmit appropriate reports and information to the National Advisory Council on International Monetary and Financial Policies. 8. Staff officers of the Committee are authorized to transmit pertinent information on System foreign currency operations to appropriate officials of the Treasury Department. 9. All Federal Reserve Banks shall participate in the foreign currency operations for System Account in accordance with paragraph 3G(1) of the Board of Governors' Statement of Procedure with Respect to Foreign Relationships of Federal Reserve Banks dated January 1, 1944. By unanimous vote, the Foreign Currency Directive was reaffirmed in the form shown below: FOREIGN CURRENCY DIRECTIVE(Reaffirmed January 29, 2008) 1. System operations in foreign currencies shall generally be directed at countering disorderly market conditions, provided that market exchange rates for the U.S. dollar reflect actions and behavior consistent with IMF Article IV, Section 1. 2. To achieve this end the System shall: A. Undertake spot and forward purchases and sales of foreign exchange. B. Maintain reciprocal currency ("swap") arrangements with selected foreign central banks. C. Cooperate in other respects with central banks of other countries and with international monetary institutions. 3. Transactions may also be undertaken: A. To adjust System balances in light of probable future needs for currencies. B. To provide means for meeting System and Treasury commitments in particular currencies, and to facilitate operations of the Exchange Stabilization Fund. C. For such other purposes as may be expressly authorized by the Committee. 4. System foreign currency operations shall be conducted: A. In close and continuous consultation and cooperation with the United States Treasury; B. In cooperation, as appropriate, with foreign monetary authorities; and C. In a manner consistent with the obligations of the United States in the International Monetary Fund regarding exchange arrangements under IMF Article IV. By unanimous vote, the Procedural Instructions with Respect to Foreign Currency Operations were reaffirmed in the form shown below: PROCEDURAL INSTRUCTIONS WITH RESPECT TO FOREIGN CURRENCY OPERATIONS(Reaffirmed January 29, 2008) In conducting operations pursuant to the authorization and direction of the Federal Open Market Committee as set forth in the Authorization for Foreign Currency Operations and the Foreign Currency Directive, the Federal Reserve Bank of New York, through the Manager, System Open Market Account ("Manager"), shall be guided by the following procedural understandings with respect to consultations and clearances with the Committee, the Foreign Currency Subcommittee, and the Chairman of the Committee. All operations undertaken pursuant to such clearances shall be reported promptly to the Committee. 1. The Manager shall clear with the Subcommittee (or with the Chairman, if the Chairman believes that consultation with the Subcommittee is not feasible in the time available): A. Any operation that would result in a change in the System's overall open position in foreign currencies exceeding $300 million on any day or $600 million since the most recent regular meeting of the Committee. B. Any operation that would result in a change on any day in the System's net position in a single foreign currency exceeding $150 million, or $300 million when the operation is associated with repayment of swap drawings. C. Any operation that might generate a substantial volume of trading in a particular currency by the System, even though the change in the System's net position in that currency might be less than the limits specified in 1.B. D. Any swap drawing proposed by a foreign bank not exceeding the larger of (i) $200 million or (ii) 15 percent of the size of the swap arrangement. 2. The Manager shall clear with the Committee (or with the Subcommittee, if the Subcommittee believes that consultation with the full Committee is not feasible in the time available, or with the Chairman, if the Chairman believes that consultation with the Subcommittee is not feasible in the time available): A. Any operation that would result in a change in the System's overall open position in foreign currencies exceeding $1.5 billion since the most recent regular meeting of the Committee. B. Any swap drawing proposed by a foreign bank exceeding the larger of (i) $200 million or (ii) 15 percent of the size of the swap arrangement. 3. The Manager shall also consult with the Subcommittee or the Chairman about proposed swap drawings by the System and about any operations that are not of a routine character. The Manager of the System Open Market Account reported on recent developments in foreign exchange markets. There were no open market operations in foreign currencies for the System's account in the period since the previous meeting. The Manager also reported on developments in domestic financial markets and on System open market operations in government securities and federal agency obligations during the period since the previous meeting. By unanimous vote, the Committee ratified these transactions. The information reviewed at the January meeting, which included the advance data on the national income and product accounts for the fourth quarter, indicated that economic activity had decelerated sharply in recent months. The contraction in homebuilding intensified in the fourth quarter, the growth in consumer spending slowed, and survey measures of both consumer and business sentiment were at low levels. In addition, industrial production contracted in the fourth quarter. Conditions in the labor market deteriorated noticeably, with private payroll employment posting a small decline in December and the unemployment rate rising. Readings on both headline and core inflation increased in recent months, although the twelve-month change in prices of core personal consumption expenditures in December was about the same as its year-earlier value. On average, private nonfarm payroll employment in November and December rose at only about half of the average pace seen from July to October. Over 2007 as a whole, the deterioration in labor demand was most pronounced in the construction and financial activities industries, which had been hardest hit by the difficulties in the housing and mortgage markets. Manufacturing employment declined yet again in December, while the decrease in employment in retail trade nearly reversed the sizable increase in that sector recorded in November. Aggregate hours of production or nonsupervisory workers were unchanged in December.  The unemployment rate rose to 5.0 percent in December after having been at or near 4.7 percent since September. Industrial production declined in the fourth quarter, as a drag from motor vehicles and construction-related industries more than offset a positive contribution from other industries. Output in high-tech industries moderated in the fourth quarter, largely because of a deceleration in production of computers and semiconductors. Utilities output climbed for a second consecutive quarter, and mining output was boosted by increases in natural gas extraction and in crude oil. The rise in real consumer spending moderated in the fourth quarter, with outlays on non-auto consumer goods increasing weakly. Spending on services rose solidly in November (the most recent month available), led by energy services and commissions paid to stockbrokers, but warmer-than-usual temperatures in December likely damped expenditures for energy services in that month. Sales of light motor vehicles were moderate during the fourth quarter. Real disposable personal income was little changed in the fourth quarter, held down by higher consumer energy prices. Also, the wealth-to-income ratio ticked down in the third quarter, and appeared likely to decline again in the fourth quarter, as equity prices had fallen since the end of the third quarter and available indicators pointed to continued declines in house prices in the fourth quarter. In December, readings on consumer sentiment remained at relatively low levels by historical standards. Both single-family housing starts and permit issuance fell in December. Meanwhile, multifamily housing starts plunged in December, but permit issuance pointed to a rebound in multifamily starts in the near term. New home sales dropped in November and December after having held relatively steady since August, keeping inventories of unsold homes at elevated levels. Sales of existing homes also moved down in December but, on balance, had declined less in recent months than sales of new homes. Demand for housing through the end of 2007 likely continued to be restrained by tight financing conditions for jumbo and nonprime mortgages. Real spending on equipment and software rose at a sluggish rate in the fourth quarter after having posted a solid increase in the third quarter. Sales of medium and heavy trucks edged up after falling to a four-year low. Spending on high-tech capital goods increased at a moderate pace over the second half of last year. Outside of the transportation and high-tech sectors, spending on equipment appeared to have declined last quarter after having posted sizable gains over the summer. Orders and shipments rose somewhat in the fourth quarter, but imports in the first two months of the quarter were below their average in the third quarter. Nonresidential construction remained vigorous in the fourth quarter. However, indicators of future spending in this sector pointed to a slowdown in coming months, with a decline in architectural billings, a rise in retail-sector vacancy rates, and survey reports that contractors were experiencing more difficulty in obtaining funding. More generally, surveys of business conditions and sentiment deteriorated and suggested that capital spending would be reduced in the near term. Real nonfarm inventory investment excluding motor vehicles appeared to have stepped up from its average rate over the first three quarters of 2007. In November, the ratio of manufacturing and trade book-value inventories (excluding motor vehicles) to sales ticked down. The U.S. international trade deficit widened slightly in October and then more substantially in November, as increases in imports in both months more than offset increases in exports. The increases in imports almost entirely reflected a jump in the value of imported oil. Non-oil goods imports were boosted by a large increase in imports of consumer goods and small increases in several other categories, which more than offset a steep decline in imports of non-oil industrial supplies. Imports of automotive products and capital goods recorded modest gains, with the increase in capital goods primarily reflecting a jump in imports of telecommunications equipment. Imports of services grew strongly. Exports in both months were boosted by higher exports of services. Exports of industrial supplies also recorded a strong gain, aided by a large increase in exports of fuels in November. Higher exports of semiconductors, aircraft, and machinery pushed up exports of capital goods, while exports of agricultural goods increased only slightly following a large jump in the third quarter. In contrast, exports of consumer goods fell from their third-quarter level. Economic growth in the advanced foreign economies appeared to have slowed in the fourth quarter, with recent data on household expenditures and retail sales weakening on balance and consumers and businesses considerably less upbeat about growth prospects. In Japan, the estimate of real GDP growth in the third quarter was revised down, and business sentiment declined in December amidst concerns about high oil prices. In the euro area, retail sales growth declined in October and November, and consumer and business surveys in November and December pointed to economic weakness. In the United Kingdom, although real GDP grew solidly in the fourth quarter, the estimate of third-quarter real GDP growth was revised down. In Canada, indicators suggested that growth in economic activity moderated in the fourth quarter. Private employment shrank in December after having posted very strong growth in November. Incoming data on emerging-market economies pointed, on balance, to a slowing of growth in the fourth quarter. Overall, growth in emerging Asia appeared to have moderated somewhat in the fourth quarter, with trade balances declining in several countries as exports slowed. Readings on economic activity in Latin America were more mixed. Incoming data suggested that growth slowed in Mexico in the fourth quarter. In Brazil , third-quarter growth was solid, but indicators for the fourth quarter were mixed. Economic activity appeared to be strong in Argentina in both the third and fourth quarters. In the United States, headline consumer price inflation stepped up noticeably in November and December from the low rates posted in the summer. Part of the increase reflected the rapid rise in energy prices, but prices of core personal consumption expenditures (PCE) also moved up faster in those months than they had earlier in the year. The pickup in core PCE inflation over the second half of 2007 reflected an acceleration in prices that had been unusually soft earlier in the year, such as prices for apparel, prescription drugs, and nonmarket services. For the year as a whole, core PCE prices increased at about the same rate as they had in 2006. Household survey measures of expectations for year-ahead inflation picked up in November and remained at that level in December and January. Households' longer-term inflation expectations rose in December but ticked down in January. Average hourly earnings increased faster in November and December than they had in October, although over the twelve months that ended in December, this wage measure rose a bit more slowly than the elevated pace posted in 2006. At its December meeting, the FOMC lowered its target for the federal funds rate 25 basis points, to 4-1/4 percent. In addition, the Board of Governors approved a decrease of 25 basis points in the discount rate, to 4-3/4 percent, leaving the gap between the federal funds rate target and the discount rate at 50 basis points. The Committee's statement noted that incoming information suggested that economic growth was slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending. Moreover, strains in financial markets had increased in recent weeks. The Committee indicated that its action, combined with the policy actions taken earlier, should help promote moderate growth over time. Readings on core inflation had improved modestly during the year, but elevated energy and commodity prices, among other factors, might put upward pressure on inflation. In this context, the Committee judged that some inflation risk remained and said that it would continue to monitor inflation developments carefully. Recent developments, including the deterioration in financial market conditions, had increased the uncertainty surrounding the outlook for economic growth and inflation. The Committee stated that it would continue to assess the effects of financial and other developments on economic prospects and would act as needed to foster price stability and sustainable economic growth. Over the intermeeting period, the expected path of monetary policy over the next year as measured by money market futures rates tilted down sharply, primarily in response to softer-than-expected economic data releases. The Committee's action at its December meeting was largely anticipated by market participants, although some investors were surprised by the absence of any indication of accompanying measures to address strains in term funding markets. Some of that surprise was reversed the next day, following the announcement of a Term Auction Facility (TAF) and associated swap lines with the European Central Bank and the Swiss National Bank. The subsequent release of the minutes of the meeting elicited little market reaction. However, investors did mark down the expected path of policy in response to speeches by Federal Reserve officials; the speeches were interpreted as suggesting that signs of broader economic weakness and additional financial strains would likely require an easier stance of policy. The Committee's decision to reduce the target federal funds rate 75 basis points on January 22 surprised market participants and led investors to mark down further the path of policy over the next few months. Consistent with the shift in the economic outlook, the revision in policy expectations, and the reduction in the target federal funds rate, yields on nominal Treasury coupon securities declined substantially over the period since the December FOMC meeting. The yield curve steepened somewhat further, with the two-year yield dropping more than the ten-year yield. Near-term inflation compensation increased in early January amid rising oil prices, but it retreated in later weeks, along with oil prices, and declined, on net, over the period. Conditions in short-term funding markets improved notably over the intermeeting period, but strains remained. Spreads of rates on securities in interbank funding markets over risk-free rates narrowed somewhat following the announcement of the TAF on December 12 and eased considerably after year-end, although they remained at somewhat elevated levels. Spreads of rates on asset-backed commercial paper over risk-free rates also fell, on net, and the level of such paper outstanding increased in the first two weeks of January for the first time since August. In longer-term corporate markets, yields on investment-grade corporate bonds fell less than those on comparable-maturity Treasury securities, while yields on speculative-grade bonds rose considerably. As a result, corporate bond spreads climbed to their highest levels since early 2003, apparently reflecting increased concern among investors about the outlook for corporate credit quality over the next few years. Nonetheless, gross bond issuance in December remained strong. Commercial bank credit expanded briskly in December, supported by robust growth in business loans and in nonmortgage loans to households, and in the face of survey reports of tighter lending conditions. Over the intermeeting period, spreads on conforming mortgages over comparable-maturity Treasury securities remained about flat, as did spreads on jumbo mortgages, although credit availability for jumbo-mortgage borrowers continued to be tight. Broad stock price indexes fell over the intermeeting period on perceptions of a deteriorating economic outlook and additional write-downs by financial institutions. Similar stresses were again evident in the financial markets of major foreign economies. The trade-weighted foreign exchange value of the dollar against major currencies declined slightly, on balance, over the intermeeting period. Debt in the domestic nonfinancial sector was estimated to have increased somewhat more slowly in the fourth quarter than in the third. The rate of increase of nonfinancial business debt decelerated in the fourth quarter from its rapid third-quarter pace despite robust bond issuance as the rise in commercial and industrial lending moderated. Household mortgage debt expanded at a slow rate in the fourth quarter, reflecting continued weakness in home prices, declining home sales, and tighter credit conditions for some borrowers. Nonmortgage consumer credit appeared to expand at a moderate pace. In December, the increase in M2 was up slightly from its November pace, boosted primarily by inflows into the relative safety and liquidity of money market mutual funds. The rise in small time deposits moderated but remained elevated, as several thrift institutions offered attractive deposit rates to secure funding. In contrast, liquid deposits continued to increase weakly and currency contracted noticeably, the latter apparently reflecting an ongoing trend in overseas demand away from U.S. dollar bank notes and towards the euro and other currencies. In the forecast prepared for this meeting, the staff revised up slightly its estimated increase in aggregate economic activity in the fourth quarter of 2007 but revised down its projected increase for the first half of 2008. Although data on consumer spending and nonresidential construction activity for the fourth quarter had come in above the staff's expectations, most of the information received over the intermeeting period was weaker than had been previously expected. The drop in housing activity continued to intensify, conditions in labor markets appeared to have deteriorated noticeably near year-end, and factory output had weakened. Consumer confidence remained low, and indicators of business sentiment had worsened. Equity prices had also fallen sharply so far in 2008, and, while the functioning of money markets had improved, conditions in some other financial markets had become more restrictive. The staff projection showed the weakness in spending dissipating over the second half of 2008 and 2009, in response to the cumulative easing of monetary policy since August, the abatement of housing weakness, a lessening drag from high oil prices, and the prospect of fiscal stimulus. Still, projected resource utilization was lower over the next two years than in the previous forecast. The projection for core PCE price inflation in 2008 was raised slightly in response to elevated readings in recent months. The forecast for headline PCE price inflation also incorporated a somewhat higher rate of increase for energy prices for the first half of 2008; as a result, headline PCE price inflation was now expected to exceed core PCE price inflation slightly for that year. The forecasts for both headline and core PCE price inflation for 2009 were unchanged, with both receding from their 2008 levels. In conjunction with the FOMC meeting in January, all meeting participants (Federal Reserve Board members and Reserve Bank presidents) provided annual projections for economic growth, unemployment, and inflation for the period 2008 through 2010. The projections are described in the Summary of Economic Projections, which is attached as an addendum to these minutes. In their discussion of the economic situation and outlook, and in the projections that they had submitted for this meeting, participants noted that information received since the December meeting had been decidedly downbeat on balance. In particular, the drop in housing activity had intensified, factory output had weakened, news on business investment had been soft, and conditions in labor markets appeared to have deteriorated. In addition, consumer confidence had remained low and business confidence appeared to have worsened. Although the functioning of money markets had improved notably, strains remained evident in a number of other financial markets, and credit conditions had become generally more restrictive. Against this backdrop, participants expected economic growth to remain weak in the first half of this year before picking up in the second half, aided in part by a more accommodative stance of monetary policy and by likely fiscal stimulus. Further ahead, participants judged that economic growth would continue to pick up gradually in 2009 and 2010. Nonetheless, with housing activity and house prices still declining and with financial conditions for businesses and households tightening further, significant uncertainties surrounded this outlook and the risks to economic growth in the near term appeared to be weighted to the downside. Indeed, several participants noted that the risks of a downturn in the economy were significant. Inflation data had been disappointing in recent months, and a few participants cited anecdotal reports that some firms were able to pass on costs to consumers. However, with inflation expectations anticipated to remain reasonably well anchored, energy and other commodity prices expected to flatten out, and pressures on resources likely to ease, participants generally expected inflation to moderate somewhat in coming quarters. Meeting participants observed that conditions in short-term funding markets had improved considerably since the December meeting, reflecting the easing of pressures related to funding around the turn of the year as well as the implementation of the TAF. However, broader financial conditions had tightened significantly, on balance, in the weeks leading up to the meeting, as evidence of further deterioration in housing markets and investors' more pessimistic view of the economic outlook adversely affected a range of financial markets. Many participants were concerned that the drop in equity prices, coupled with the ongoing decline in house prices, implied reductions in household wealth that would likely damp consumer spending. Moreover, elevated volatility in financial markets likely reflected increased uncertainty about the economic outlook, and that greater uncertainty could lead firms and households to limit spending. The availability of credit to consumers and businesses appeared to be tightening, likely adding to restraint on economic growth. Participants discussed the risks to financial markets and institutions posed by possible further deterioration in the condition of financial guarantors, and many perceived a possibility that additional downgrades in these firms' credit ratings could put increased strains on financial markets. To be sure, some positive financial developments were evident. Banks appeared to be making some progress in strengthening their balance sheets, with several financial institutions able to raise significant amounts of capital to offset the large losses they had suffered in recent quarters. Nevertheless, participants generally viewed financial markets as still vulnerable to additional economic and credit weakness. Some noted the especially worrisome possibility of an adverse feedback loop, that is, a situation in which a tightening of credit conditions could depress investment and consumer spending, which, in turn, could feed back to a further tightening of credit conditions. In their discussion of individual sectors of the economy, meeting participants emphasized that activity in housing markets had continued to deteriorate sharply. With single-family permits and starts still falling, sales of new homes dropping precipitously, sales of existing homes flat, and inventories of unsold homes remaining elevated even in the face of falling house prices, several participants noted the absence of signs of stabilization in the sector. Of further concern were the reduced availability of nonconforming loans and the apparent tightening by banks of credit standards on mortgages, both of which had the potential for intensifying the housing contraction. The recent declines in interest rates had spurred a surge in applications for mortgage refinancing and would limit the upward resets on the rates on outstanding adjustable-rate mortgages, both of which would tend to improve some households' finances. Nonetheless, participants viewed the housing situation and its potential further effect on employment, income, and wealth as one of the major sources of downside risk to the economic outlook. Recent data as well as anecdotal information indicated that consumer spending had decelerated considerably, perhaps partly reflecting a spillover from the weakness in the housing sector. Participants remarked that declining house prices and sales appeared to be depressing consumer sentiment and that the contraction in wealth associated with decreases in home and equity prices probably was restraining spending. In addition, consumption expenditures were being damped by slower growth in real disposable income induced by high energy prices and possibly by a softening of the labor market. The December employment report showed that job growth had slowed appreciably, and other indicators also pointed to emerging weakness in the labor market in the intermeeting period. And spending in the future could be affected by an ongoing tightening in the availability of consumer credit amid signs that lenders were becoming increasingly cautious in view of some deterioration of credit performance on consumer loans and widening expectations of slower income growth. Some participants, however, cited evidence that workers in some sectors were still in short supply and saw signs that the labor market remained resilient. The outlook for business investment had turned weaker as well since the time of the December meeting. Several participants reported that firms in their districts were reducing capital expenditures in anticipation of a slowing in sales. Manufacturing activity appeared to have slowed or contracted in many districts. Although a few participants reported more upbeat attitudes among firms in the technology and energy sectors, business sentiment overall appeared to be declining. Moreover, a number of indicators pointed to a tightening in credit availability to businesses. For example, the Senior Loan Officer Opinion Survey on Bank Lending Practices indicated that banks had tightened lending standards and pricing terms on business loans. Lending standards had been raised especially sharply on commercial real estate loans. While real outlays for nonresidential construction apparently continued to rise through the fourth quarter, anecdotal evidence pointed to a weakening of commercial real estate spending in several districts, with some projects being canceled or scaled back. Most participants anticipated that a fiscal stimulus package, including tax rebates for households and bonus depreciation allowances for businesses, would be enacted before long and would support economic growth in the second half of the year. Some pointed out, however, that the fiscal stimulus package might not help in the near term, when the risks of a downturn in economic activity appeared largest. In addition, the effects of the proposed package would likely be temporary, with the stimulus reversing in 2009. With regard to the external sector, some participants noted that growth abroad had recently been strong and that increasing U.S. exports had been a significant source of strength for the U.S. economy of late. However, available data suggested that economic activity outside the United States appeared to be decelerating somewhat. Although slowing foreign growth would reduce a source of support for the U.S. economy at the same time that domestic spending was slackening, it could also damp commodity prices and help reduce global price pressures. Participants agreed that the inflation data that were received since the December meeting had been disappointing. But many believed that the slow growth in economic activity anticipated for the first half of this year and the associated slack in resource utilization would contribute to an easing of price pressures. Moreover, a leveling-off of energy and commodity prices such as that embedded in futures markets would also help moderate inflation pressures. However, some participants cautioned that commodity prices had remained stubbornly high for quite some time and that inferences drawn in the past from futures markets about likely trends in such prices had often proven inaccurate. Participants also related anecdotal evidence of firms facing increasing input cost pressures and in some cases being able to pass on those costs to consumers. Moreover, headline inflation had been generally above 2 percent over the past four years, and participants noted that such persistently elevated readings could ultimately affect inflation expectations. Some survey measures of inflation expectations had edged up in recent months, and longer-term financial market gauges of inflation compensation had climbed. The latter probably reflected at least in part increased uncertainty--inflation risk--rather than greater inflation expectations; increases in nominal wages did not appear to be incorporating higher inflation expectations. On balance, expectations seemed to remain fairly well anchored, but participants agreed that continued stability of inflation expectations was essential. In the discussion of monetary policy for the intermeeting period, most members believed that a further significant easing in policy was warranted at this meeting to address the considerable worsening of the economic outlook since December as well as increased downside risks. As had been the case in some previous cyclical episodes, a relatively low real federal funds rate now appeared appropriate for a time to counter the factors that were restraining economic growth, including the slide in housing activity and prices, the tightening of credit availability, and the drop in equity prices. Members judged that a 50 basis point reduction in the federal funds rate, together with the Committee's previous policy actions, would bring the real short-term rate to a level that was likely to help the economy expand at a moderate pace over time. Still, with no signs of stabilization in the housing sector and with financial conditions not yet stabilized, the Committee agreed that downside risks to growth would remain even after this action. Members were also mindful of the need for policy to promote price stability, and some noted that, when prospects for growth had improved, a reversal of a portion of the recent easing actions, possibly even a rapid reversal, might be appropriate. However, most members agreed that a 50 basis point easing at this meeting would likely not contribute to an increase in inflation pressures given the actual and expected weakness in economic growth and the consequent reduction in pressures on resources. Rather, members agreed that inflation was likely to moderate in coming quarters, but they also concurred that it would be necessary to continue to monitor inflation developments carefully. The Committee agreed that the statement to be released after the meeting should indicate that financial markets remained under considerable stress, that credit had tightened further for some businesses and households, and that recent information pointed to a deepening of the housing contraction as well as to some softening in labor markets. The Committee again viewed it as appropriate to indicate that it expected inflation to moderate in coming quarters but also to emphasize that it would be necessary to monitor inflation developments carefully. The action taken at the meeting, combined with the cumulative policy easing already in place, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, members concurred that downside risks to growth remained, and that the Committee would continue to assess the effects of financial and other developments on economic prospects and would act in a timely manner as needed to address those risks. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: “The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output.  To further its long-run objectives, the Committee in the immediate future seeks conditions in reserve markets consistent with reducing the federal funds rate to an average of around 3 percent.” The vote encompassed approval of the statement below to be released at 2:15 p.m.: “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.” Votes for this action: Messrs. Bernanke, Geithner, Kohn, Kroszner, and Mishkin, Ms. Pianalto, Messrs. Plosser, Stern, and Warsh. Votes against this action: Mr. Fisher. Mr. Fisher dissented because he preferred to leave the federal funds rate unchanged. The rate had been lowered by 75 basis points just one week earlier in a decision he supported, which brought the funds rate down 175 basis points since September. Given these actions, he felt that monetary policy was already quite stimulative, while headline inflation was too high at more than 3 percent over the last year. Demand-pull inflation pressures from emerging-market economies abroad appeared to be continuing, and anecdotal reports from business contacts suggested greater willingness domestically to pass rising costs through to prices. Moreover, Mr. Fisher was concerned that inflation expectations could become unanchored if the perception of negative real rates of interest were to become pervasive. At the same time, the economy appeared to be still growing, albeit at a substantially weakened pace. Given the policy tradeoffs confronting the FOMC at this time, Mr. Fisher saw the upside risks to inflation as being greater than the downside risks to longer-term economic growth, especially in light of the recent, aggressive easing of monetary policy and the lag before it would have its full effect on the economy. The Committee then turned to a discussion of selected longer-term regulatory and structural issues raised by recent financial market developments. A staff presentation began by noting that the difficulties in financial markets started with unexpectedly heavy losses on subprime mortgages and related structured securities, which led investors to question the valuations of complex structured instruments more generally and to pull back from such investments. The resulting effects in markets put pressure on some large banking organizations, particularly through losses on subprime-mortgage-related securities and other assets, and through the unplanned expansion of balance sheets triggered by the disruption of various markets in which assets were securitized. The remainder of the presentation, and the discussion by meeting participants, focused on two issues: first, the important role of credit ratings in the securitization process, including the methods used to set ratings and the way investors use ratings in making their investment decisions; and second, how weaknesses in risk management practices at some large global financial services organizations appear to have led to outsized losses at those institutions, and the reasons that such weaknesses may have emerged at some firms and not at others. It was agreed that the next meeting of the Committee would be held on Tuesday, March 18, 2008. The meeting adjourned at 1:15 p.m. Notation VoteBy notation vote completed on December 31, 2007, the Committee unanimously approved the minutes of the FOMC meeting held on December 11, 2007. Conference CallsOn January 9, 2008, the Committee reviewed recent economic data and financial market developments. The available information suggested that the downside risks to growth had increased significantly since the time of the December FOMC meeting. Participants discussed the possibility that the slowing in economic growth and associated softening in labor markets might exacerbate the tightening in credit conditions and the correction in housing market activity and prices, which could in turn weigh further on economic activity. Participants emphasized the risks that such adverse dynamics could pose to economic and financial stability. Participants noted that core price inflation had edged up in recent months, boosted in part by the pass-through of higher energy costs to the prices of core consumer goods and services. Inflation was expected to edge lower this year as energy prices leveled off and pressures on resources eased. However, this slowing in inflation was dependent on inflation expectations remaining well anchored, and participants noted that considerable uncertainty surrounded the inflation outlook. Most participants were of the view that substantial additional policy easing in the near term might well be necessary to promote moderate economic growth over time and to reduce the downside risks to growth, and participants discussed the possible timing of such policy actions. On January 21, 2008, the Committee again met by conference call. Incoming information since the conference call on January 9 had reinforced the view that the outlook for economic activity was weakening. Among other developments, strains in some financial markets had intensified, as it appeared that investors were becoming increasingly concerned about the economic outlook and the downside risks to activity. Participants discussed the possibility that these developments could lead to an excessive pull-back in credit availability and in investment. Although inflation was expected to moderate from recent elevated levels, participants stressed that this outlook relied upon inflation expectations remaining well anchored and that the inflation situation should continue to be monitored carefully. All members judged that a substantial easing in policy in the near term was appropriate to foster moderate economic growth and reduce the downside risks to economic activity. Most members judged that an immediate reduction in the federal funds rate was called for to begin aligning the real policy rate with a weakening economic situation. Such an action, by demonstrating the Committee's commitment to act decisively to support economic activity, might reduce concerns about economic prospects that seemed to be contributing to the deteriorating conditions in financial markets, which could feed back on the economy. However, some concern was expressed that an immediate policy action could be misinterpreted as directed at recent declines in stock prices, rather than the broader economic outlook, and one member believed it preferable to delay policy action until the scheduled FOMC meeting on January 29-30. Some members also noted that were policy to become very stimulative it would be important for the Committee to be decisive in reversing the course of interest rates once the economy had strengthened and downside risks had abated. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee in the immediate future seeks conditions in reserve markets consistent with reducing the federal funds rate to an average of around 3-1/2 percent." The vote encompassed approval of the text below for inclusion in the statement to be released at 8:30 a.m. on Tuesday, January 22: “The Federal Open Market Committee has decided to lower its target for the federal funds rate 75 basis points to 3-1/2 percent. The Committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth. While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming 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. Appreciable 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.” Votes for this action: Messrs. Bernanke, Geithner, Evans, Hoenig, Kohn, Kroszner, Rosengren, and Warsh. Votes against this action: Mr. Poole Absent and not voting: Mr. Mishkin Mr. Poole dissented because he did not believe that current conditions justified policy action before the regularly scheduled meeting the following week. _____________________________ Brian F. MadiganSecretary Return to top

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Minute

A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, January 29, 2008 at 2:00 p.m. and continued on Wednesday, January 30, 2008 at 9:00 a.m. Present:Mr. Bernanke, ChairmanMr. Geithner, Vice ChairmanMr. FisherMr. KohnMr. KrosznerMr. MishkinMs. PianaltoMr. PlosserMr. SternMr. Warsh Messrs. Evans, Lacker, and Lockhart, and Ms. Yellen, Alternate Members of the Federal Open Market Committee Messrs. Hoenig, Poole, and Rosengren, Presidents of the Federal Reserve Banks of Kansas City, St. Louis, and Boston, respectively Mr. Madigan, Secretary and EconomistMs. Danker, Deputy SecretaryMr. Skidmore, Assistant SecretaryMs. Smith, Assistant SecretaryMr. Alvarez, General CounselMr. Baxter, Deputy General CounselMr. Sheets, EconomistMr. Stockton, Economist Messrs. Connors, English, and Kamin, Ms. Mester, Messrs. Rosenblum, Slifman, Sniderman, Tracy, and Wilcox, Associate Economists Mr. Dudley, Manager, System Open Market Account Mr. Struckmeyer,1 Deputy Staff Director, Office of Staff Director for Management, Board of Governors Mr. Parkinson,2 Deputy Director, Division of Research and Statistics, Board of Governors Mr. Clouse, Senior Associate Director, Division of Monetary Affairs, Board of Governors Ms. Liang and Messrs. Reifschneider and Wascher, Associate Directors, Division of Research and Statistics, Board of Governors Ms. Barger2 and Mr. Greenlee,2 Associate Directors, Division of Banking Supervision and Regulation, Board of Governors Mr. Gibson,2 Deputy Associate Director, Division of Research and Statistics, Board of Governors Mr. Dale, Senior Adviser, Division of Monetary Affairs, Board of Governors Mr. Oliner, Senior Adviser, Division of Research and Statistics, Board of Governors Messrs. Durham and Perli, Assistant Directors, Division of Monetary Affairs, Board of Governors Mr. Blanchard, Assistant to the Board, Office of Board Members, Board of Governors Mr. Small, Project Manager, Division of Monetary Affairs, Board of Governors Mr. Bassett,3 Senior Economist, Division of Monetary Affairs, Board of Governors Mr. Doyle,3 Senior Economist, Division of International Finance, Board of Governors Ms. Kusko, 3 Senior Economist, Division of Research and Statistics, Board of Governors Mr. Luecke, Senior Financial Analyst, Division of Monetary Affairs, Board of Governors Mr. Driscoll, Economist, Division of Monetary Affairs, Board of Governors Ms. Low, Open Market Secretariat Specialist, Division of Monetary Affairs, Board of Governors Ms. Green, First Vice President, Federal Reserve Bank of Richmond Messrs. Fuhrer and Judd, Executive Vice Presidents, Federal Reserve Banks of Boston and San Francisco, respectively Messrs. Altig and Angulo,2 Mses. Hirtle2 and Mosser, Messrs. Peters2 and Rasche, Senior Vice Presidents, Federal Reserve Banks of Atlanta, New York, New York, New York, New York, and St. Louis, respectively Mr. Hakkio, Senior Adviser, Federal Reserve Bank of Kansas City Mr. Krane, Vice President, Federal Reserve Bank of Chicago Mr. Weber, Senior Research Officer, Federal Reserve Bank of Minneapolis 1. Attended Wednesday's session. Return to text2. Attended portion of the meeting relating to the analysis of policy issues raised by financial market developments. Return to text3. Attended portion of the meeting relating to the economic outlook and monetary policy decision. Return to text In the agenda for this meeting, it was reported that advices of the election of the following members and alternate members of the Federal Open Market Committee for a term beginning January 29, 2008 had been received and that these individuals had executed their oaths of office. The elected members and alternate members were as follows: Timothy F. Geithner, President of the Federal Reserve Bank of New York, with Christine M. Cumming, First Vice President of the Federal Reserve Bank of New York, as alternate. Charles I. Plosser, President of the Federal Reserve Bank of Philadelphia, with Jeffrey M. Lacker, President of the Federal Reserve Bank of Richmond, as alternate. Sandra Pianalto, President of the Federal Reserve Bank of Cleveland, with Charles L. Evans, President of the Federal Reserve Bank of Chicago, as alternate. Richard W. Fisher, President of the Federal Reserve Bank of Dallas, with Dennis P. Lockhart, President of the Federal Reserve Bank of Atlanta, as alternate. Gary H. Stern, President of the Federal Reserve Bank of Minneapolis, with Janet L. Yellen, President of the Federal Reserve Bank of San Francisco, as alternate. By unanimous vote, the following officers of the Federal Open Market Committee were selected to serve until the selection of their successors at the first regularly scheduled meeting of the Committee in 2009: Ben S. Bernanke Chairman Timothy F. Geithner Vice Chairman Brian F. Madigan Secretary and Economist Deborah J. Danker Deputy Secretary David W. Skidmore Assistant Secretary Michelle A. Smith Assistant Secretary Scott G. Alvarez General Counsel Thomas C. Baxter, Jr. Deputy General Counsel Richard M. Ashton Assistant General Counsel D. Nathan Sheets Economist David J. Stockton Economist   Thomas A. Connors William B. English Steven B. Kamin Loretta J. Mester Arthur J. Rolnick Harvey Rosenblum Lawrence Slifman Mark S. Sniderman Joseph S. Tracy David W. Wilcox Associate Economists By unanimous vote, the Committee made a few amendments to its rules and to the Program for Security of FOMC Information. The amendments primarily addressed the Committee's practice of approving the minutes via notation vote, attendance at Committee meetings, and access to Committee information by System employees. By unanimous vote, the Federal Reserve Bank of New York was selected to execute transactions for the System Open Market Account. By unanimous vote, William C. Dudley was selected to serve at the pleasure of the Committee as Manager, System Open Market Account, on the understanding that his selection was subject to being satisfactory to the Federal Reserve Bank of New York. By unanimous vote, the Authorization for Domestic Open Market Operations was reaffirmed in the form shown below: AUTHORIZATION FOR DOMESTIC OPEN MARKET OPERATIONS(Reaffirmed January 29, 2008) 1. The Federal Open Market Committee authorizes and directs the Federal Reserve Bank of New York, to the extent necessary to carry out the most recent domestic policy directive adopted at a meeting of the Committee: (a) To buy or sell U.S. Government securities, including securities of the Federal Financing Bank, and securities that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the United States in the open market, from or to securities dealers and foreign and international accounts maintained at the Federal Reserve Bank of New York, on a cash, regular, or deferred delivery basis, for the System Open Market Account at market prices, and, for such Account, to exchange maturing U.S. Government and Federal agency securities with the Treasury or the individual agencies or to allow them to mature without replacement; (b) To buy U.S. Government securities, obligations that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the United States, from dealers for the account of the System Open Market Account under agreements for repurchase of such securities or obligations in 65 business days or less, at rates that, unless otherwise expressly authorized by the Committee, shall be determined by competitive bidding, after applying reasonable limitations on the volume of agreements with individual dealers. (c) To sell U.S. Government securities and obligations that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the United States to dealers for System Open Market Account under agreements for the resale by dealers of such securities or obligations in 65 business days or less, at rates that, unless otherwise expressly authorized by the Committee, shall be determined by competitive bidding, after applying reasonable limitations on the volume of agreements with individual dealers. 2. In order to ensure the effective conduct of open market operations, the Federal Open Market Committee authorizes the Federal Reserve Bank of New York to lend on an overnight basis U.S. Government securities held in the System Open Market Account to dealers at rates that shall be determined by competitive bidding. The Federal Reserve Bank of New York shall set a minimum lending fee consistent with the objectives of the program and apply reasonable limitations on the total amount of a specific issue that may be auctioned and on the amount of securities that each dealer may borrow. The Federal Reserve Bank of New York may reject bids which could facilitate a dealer's ability to control a single issue as determined solely by the Federal Reserve Bank of New York. 3. In order to ensure the effective conduct of open market operations, while assisting in the provision of short-term investments for foreign and international accounts maintained at the Federal Reserve Bank of New York and accounts maintained at the Federal Reserve Bank of New York as fiscal agent of the United States pursuant to Section 15 of the Federal Reserve Act, the Federal Open Market Committee authorizes and directs the Federal Reserve Bank of New York (a) for System Open Market Account, to sell U.S. Government securities to such accounts on the bases set forth in paragraph l(a) under agreements providing for the resale by such accounts of those securities in 65 business days or less on terms comparable to those available on such transactions in the market; and (b) for New York Bank account, when appropriate, to undertake with dealers, subject to the conditions imposed on purchases and sales of securities in paragraph l(b), repurchase agreements in U.S. Government and agency securities, and to arrange corresponding sale and repurchase agreements between its own account and such foreign, international, and fiscal agency accounts maintained at the Bank. Transactions undertaken with such accounts under the provisions of this paragraph may provide for a service fee when appropriate. 4. In the execution of the Committee's decision regarding policy during any intermeeting period, the Committee authorizes and directs the Federal Reserve Bank of New York, upon the instruction of the Chairman of the Committee, to adjust somewhat in exceptional circumstances the degree of pressure on reserve positions and hence the intended federal funds rate. Any such adjustment shall be made in the context of the Committee's discussion and decision at its most recent meeting and the Committee's long-run objectives for price stability and sustainable economic growth, and shall be based on economic, financial, and monetary developments during the intermeeting period. Consistent with Committee practice, the Chairman, if feasible, will consult with the Committee before making any adjustment. By unanimous vote, the Committee approved the Authorization for Foreign Currency Operations with an amendment to paragraph 1.D. regarding the maximum open position in all foreign currencies. Accordingly, the Authorization for Foreign Currency Operations was adopted, as shown below: AUTHORIZATION FOR FOREIGN CURRENCY OPERATIONS(Amended January 29, 2008) 1. The Federal Open Market Committee authorizes and directs the Federal Reserve Bank of New York, for System Open Market Account, to the extent necessary to carry out the Committee's foreign currency directive and express authorizations by the Committee pursuant thereto, and in conformity with such procedural instructions as the Committee may issue from time to time: A. To purchase and sell the following foreign currencies in the form of cable transfers through spot or forward transactions on the open market at home and abroad, including transactions with the U.S. Treasury, with the U.S. Exchange Stabilization Fund established by Section 10 of the Gold Reserve Act of 1934, with foreign monetary authorities, with the Bank for International Settlements, and with other international financial institutions: Canadian dollarsDanish kronerEuroPounds sterlingJapanese yenMexican pesosNorwegian kronerSwedish kronorSwiss francs B. To hold balances of, and to have outstanding forward contracts to receive or to deliver, the foreign currencies listed in paragraph A above. C. To draw foreign currencies and to permit foreign banks to draw dollars under the reciprocal currency arrangements listed in paragraph 2 below, provided that drawings by either party to any such arrangement shall be fully liquidated within 12 months after any amount outstanding at that time was first drawn, unless the Committee, because of exceptional circumstances, specifically authorizes a delay. D. To maintain an overall open position in all foreign currencies not exceeding $25.0 billion. For this purpose, the overall open position in all foreign currencies is defined as the sum (disregarding signs) of net positions in individual currencies, excluding changes in dollar value due to foreign exchange rate movements and interest accruals. The net position in a single foreign currency is defined as holdings of balances in that currency, plus outstanding contracts for future receipt, minus outstanding contracts for future delivery of that currency, i.e., as the sum of these elements with due regard to sign. 2. The Federal Open Market Committee directs the Federal Reserve Bank of New York to maintain reciprocal currency arrangements ("swap" arrangements) for the System Open Market Account for periods up to a maximum of 12 months with the following foreign banks, which are among those designated by the Board of Governors of the Federal Reserve System under Section 214.5 of Regulation N, Relations with Foreign Banks and Bankers, and with the approval of the Committee to renew such arrangements on maturity: Foreign bank Amount of arrangement(millions of dollars equivalent) Bank of Canada 2,000 Bank of Mexico 3,000 Any changes in the terms of existing swap arrangements, and the proposed terms of any new arrangements that may be authorized, shall be referred for review and approval to the Committee. 3. All transactions in foreign currencies undertaken under paragraph 1.A. above shall, unless otherwise expressly authorized by the Committee, be at prevailing market rates. For the purpose of providing an investment return on System holdings of foreign currencies or for the purpose of adjusting interest rates paid or received in connection with swap drawings, transactions with foreign central banks may be undertaken at non-market exchange rates. 4. It shall be the normal practice to arrange with foreign central banks for the coordination of foreign currency transactions. In making operating arrangements with foreign central banks on System holdings of foreign currencies, the Federal Reserve Bank of New York shall not commit itself to maintain any specific balance, unless authorized by the Federal Open Market Committee. Any agreements or understandings concerning the administration of the accounts maintained by the Federal Reserve Bank of New York with the foreign banks designated by the Board of Governors under Section 214.5 of Regulation N shall be referred for review and approval to the Committee. 5. Foreign currency holdings shall be invested to ensure that adequate liquidity is maintained to meet anticipated needs and so that each currency portfolio shall generally have an average duration of no more than 18 months (calculated as Macaulay duration). Such investments may include buying or selling outright obligations of, or fully guaranteed as to principal and interest by, a foreign government or agency thereof; buying such securities under agreements for repurchase of such securities; selling such securities under agreements for the resale of such securities; and holding various time and other deposit accounts at foreign institutions. In addition, when appropriate in connection with arrangements to provide investment facilities for foreign currency holdings, U.S. Government securities may be purchased from foreign central banks under agreements for repurchase of such securities within 30 calendar days. 6. All operations undertaken pursuant to the preceding paragraphs shall be reported promptly to the Foreign Currency Subcommittee and the Committee. The Foreign Currency Subcommittee consists of the Chairman and Vice Chairman of the Committee, the Vice Chairman of the Board of Governors, and such other member of the Board as the Chairman may designate (or in the absence of members of the Board serving on the Subcommittee, other Board members designated by the Chairman as alternates, and in the absence of the Vice Chairman of the Committee, his alternate). Meetings of the Subcommittee shall be called at the request of any member, or at the request of the Manager, System Open Market Account ("Manager"), for the purposes of reviewing recent or contemplated operations and of consulting with the Manager on other matters relating to his responsibilities. At the request of any member of the Subcommittee, questions arising from such reviews and consultations shall be referred for determination to the Federal Open Market Committee. 7. The Chairman is authorized: A. With the approval of the Committee, to enter into any needed agreement or understanding with the Secretary of the Treasury about the division of responsibility for foreign currency operations between the System and the Treasury; B. To keep the Secretary of the Treasury fully advised concerning System foreign currency operations, and to consult with the Secretary on policy matters relating to foreign currency operations; C. From time to time, to transmit appropriate reports and information to the National Advisory Council on International Monetary and Financial Policies. 8. Staff officers of the Committee are authorized to transmit pertinent information on System foreign currency operations to appropriate officials of the Treasury Department. 9. All Federal Reserve Banks shall participate in the foreign currency operations for System Account in accordance with paragraph 3G(1) of the Board of Governors' Statement of Procedure with Respect to Foreign Relationships of Federal Reserve Banks dated January 1, 1944. By unanimous vote, the Foreign Currency Directive was reaffirmed in the form shown below: FOREIGN CURRENCY DIRECTIVE(Reaffirmed January 29, 2008) 1. System operations in foreign currencies shall generally be directed at countering disorderly market conditions, provided that market exchange rates for the U.S. dollar reflect actions and behavior consistent with IMF Article IV, Section 1. 2. To achieve this end the System shall: A. Undertake spot and forward purchases and sales of foreign exchange. B. Maintain reciprocal currency ("swap") arrangements with selected foreign central banks. C. Cooperate in other respects with central banks of other countries and with international monetary institutions. 3. Transactions may also be undertaken: A. To adjust System balances in light of probable future needs for currencies. B. To provide means for meeting System and Treasury commitments in particular currencies, and to facilitate operations of the Exchange Stabilization Fund. C. For such other purposes as may be expressly authorized by the Committee. 4. System foreign currency operations shall be conducted: A. In close and continuous consultation and cooperation with the United States Treasury; B. In cooperation, as appropriate, with foreign monetary authorities; and C. In a manner consistent with the obligations of the United States in the International Monetary Fund regarding exchange arrangements under IMF Article IV. By unanimous vote, the Procedural Instructions with Respect to Foreign Currency Operations were reaffirmed in the form shown below: PROCEDURAL INSTRUCTIONS WITH RESPECT TO FOREIGN CURRENCY OPERATIONS(Reaffirmed January 29, 2008) In conducting operations pursuant to the authorization and direction of the Federal Open Market Committee as set forth in the Authorization for Foreign Currency Operations and the Foreign Currency Directive, the Federal Reserve Bank of New York, through the Manager, System Open Market Account ("Manager"), shall be guided by the following procedural understandings with respect to consultations and clearances with the Committee, the Foreign Currency Subcommittee, and the Chairman of the Committee. All operations undertaken pursuant to such clearances shall be reported promptly to the Committee. 1. The Manager shall clear with the Subcommittee (or with the Chairman, if the Chairman believes that consultation with the Subcommittee is not feasible in the time available): A. Any operation that would result in a change in the System's overall open position in foreign currencies exceeding $300 million on any day or $600 million since the most recent regular meeting of the Committee. B. Any operation that would result in a change on any day in the System's net position in a single foreign currency exceeding $150 million, or $300 million when the operation is associated with repayment of swap drawings. C. Any operation that might generate a substantial volume of trading in a particular currency by the System, even though the change in the System's net position in that currency might be less than the limits specified in 1.B. D. Any swap drawing proposed by a foreign bank not exceeding the larger of (i) $200 million or (ii) 15 percent of the size of the swap arrangement. 2. The Manager shall clear with the Committee (or with the Subcommittee, if the Subcommittee believes that consultation with the full Committee is not feasible in the time available, or with the Chairman, if the Chairman believes that consultation with the Subcommittee is not feasible in the time available): A. Any operation that would result in a change in the System's overall open position in foreign currencies exceeding $1.5 billion since the most recent regular meeting of the Committee. B. Any swap drawing proposed by a foreign bank exceeding the larger of (i) $200 million or (ii) 15 percent of the size of the swap arrangement. 3. The Manager shall also consult with the Subcommittee or the Chairman about proposed swap drawings by the System and about any operations that are not of a routine character. The Manager of the System Open Market Account reported on recent developments in foreign exchange markets. There were no open market operations in foreign currencies for the System's account in the period since the previous meeting. The Manager also reported on developments in domestic financial markets and on System open market operations in government securities and federal agency obligations during the period since the previous meeting. By unanimous vote, the Committee ratified these transactions. The information reviewed at the January meeting, which included the advance data on the national income and product accounts for the fourth quarter, indicated that economic activity had decelerated sharply in recent months. The contraction in homebuilding intensified in the fourth quarter, the growth in consumer spending slowed, and survey measures of both consumer and business sentiment were at low levels. In addition, industrial production contracted in the fourth quarter. Conditions in the labor market deteriorated noticeably, with private payroll employment posting a small decline in December and the unemployment rate rising. Readings on both headline and core inflation increased in recent months, although the twelve-month change in prices of core personal consumption expenditures in December was about the same as its year-earlier value. On average, private nonfarm payroll employment in November and December rose at only about half of the average pace seen from July to October. Over 2007 as a whole, the deterioration in labor demand was most pronounced in the construction and financial activities industries, which had been hardest hit by the difficulties in the housing and mortgage markets. Manufacturing employment declined yet again in December, while the decrease in employment in retail trade nearly reversed the sizable increase in that sector recorded in November. Aggregate hours of production or nonsupervisory workers were unchanged in December.  The unemployment rate rose to 5.0 percent in December after having been at or near 4.7 percent since September. Industrial production declined in the fourth quarter, as a drag from motor vehicles and construction-related industries more than offset a positive contribution from other industries. Output in high-tech industries moderated in the fourth quarter, largely because of a deceleration in production of computers and semiconductors. Utilities output climbed for a second consecutive quarter, and mining output was boosted by increases in natural gas extraction and in crude oil. The rise in real consumer spending moderated in the fourth quarter, with outlays on non-auto consumer goods increasing weakly. Spending on services rose solidly in November (the most recent month available), led by energy services and commissions paid to stockbrokers, but warmer-than-usual temperatures in December likely damped expenditures for energy services in that month. Sales of light motor vehicles were moderate during the fourth quarter. Real disposable personal income was little changed in the fourth quarter, held down by higher consumer energy prices. Also, the wealth-to-income ratio ticked down in the third quarter, and appeared likely to decline again in the fourth quarter, as equity prices had fallen since the end of the third quarter and available indicators pointed to continued declines in house prices in the fourth quarter. In December, readings on consumer sentiment remained at relatively low levels by historical standards. Both single-family housing starts and permit issuance fell in December. Meanwhile, multifamily housing starts plunged in December, but permit issuance pointed to a rebound in multifamily starts in the near term. New home sales dropped in November and December after having held relatively steady since August, keeping inventories of unsold homes at elevated levels. Sales of existing homes also moved down in December but, on balance, had declined less in recent months than sales of new homes. Demand for housing through the end of 2007 likely continued to be restrained by tight financing conditions for jumbo and nonprime mortgages. Real spending on equipment and software rose at a sluggish rate in the fourth quarter after having posted a solid increase in the third quarter. Sales of medium and heavy trucks edged up after falling to a four-year low. Spending on high-tech capital goods increased at a moderate pace over the second half of last year. Outside of the transportation and high-tech sectors, spending on equipment appeared to have declined last quarter after having posted sizable gains over the summer. Orders and shipments rose somewhat in the fourth quarter, but imports in the first two months of the quarter were below their average in the third quarter. Nonresidential construction remained vigorous in the fourth quarter. However, indicators of future spending in this sector pointed to a slowdown in coming months, with a decline in architectural billings, a rise in retail-sector vacancy rates, and survey reports that contractors were experiencing more difficulty in obtaining funding. More generally, surveys of business conditions and sentiment deteriorated and suggested that capital spending would be reduced in the near term. Real nonfarm inventory investment excluding motor vehicles appeared to have stepped up from its average rate over the first three quarters of 2007. In November, the ratio of manufacturing and trade book-value inventories (excluding motor vehicles) to sales ticked down. The U.S. international trade deficit widened slightly in October and then more substantially in November, as increases in imports in both months more than offset increases in exports. The increases in imports almost entirely reflected a jump in the value of imported oil. Non-oil goods imports were boosted by a large increase in imports of consumer goods and small increases in several other categories, which more than offset a steep decline in imports of non-oil industrial supplies. Imports of automotive products and capital goods recorded modest gains, with the increase in capital goods primarily reflecting a jump in imports of telecommunications equipment. Imports of services grew strongly. Exports in both months were boosted by higher exports of services. Exports of industrial supplies also recorded a strong gain, aided by a large increase in exports of fuels in November. Higher exports of semiconductors, aircraft, and machinery pushed up exports of capital goods, while exports of agricultural goods increased only slightly following a large jump in the third quarter. In contrast, exports of consumer goods fell from their third-quarter level. Economic growth in the advanced foreign economies appeared to have slowed in the fourth quarter, with recent data on household expenditures and retail sales weakening on balance and consumers and businesses considerably less upbeat about growth prospects. In Japan, the estimate of real GDP growth in the third quarter was revised down, and business sentiment declined in December amidst concerns about high oil prices. In the euro area, retail sales growth declined in October and November, and consumer and business surveys in November and December pointed to economic weakness. In the United Kingdom, although real GDP grew solidly in the fourth quarter, the estimate of third-quarter real GDP growth was revised down. In Canada, indicators suggested that growth in economic activity moderated in the fourth quarter. Private employment shrank in December after having posted very strong growth in November. Incoming data on emerging-market economies pointed, on balance, to a slowing of growth in the fourth quarter. Overall, growth in emerging Asia appeared to have moderated somewhat in the fourth quarter, with trade balances declining in several countries as exports slowed. Readings on economic activity in Latin America were more mixed. Incoming data suggested that growth slowed in Mexico in the fourth quarter. In Brazil , third-quarter growth was solid, but indicators for the fourth quarter were mixed. Economic activity appeared to be strong in Argentina in both the third and fourth quarters. In the United States, headline consumer price inflation stepped up noticeably in November and December from the low rates posted in the summer. Part of the increase reflected the rapid rise in energy prices, but prices of core personal consumption expenditures (PCE) also moved up faster in those months than they had earlier in the year. The pickup in core PCE inflation over the second half of 2007 reflected an acceleration in prices that had been unusually soft earlier in the year, such as prices for apparel, prescription drugs, and nonmarket services. For the year as a whole, core PCE prices increased at about the same rate as they had in 2006. Household survey measures of expectations for year-ahead inflation picked up in November and remained at that level in December and January. Households' longer-term inflation expectations rose in December but ticked down in January. Average hourly earnings increased faster in November and December than they had in October, although over the twelve months that ended in December, this wage measure rose a bit more slowly than the elevated pace posted in 2006. At its December meeting, the FOMC lowered its target for the federal funds rate 25 basis points, to 4-1/4 percent. In addition, the Board of Governors approved a decrease of 25 basis points in the discount rate, to 4-3/4 percent, leaving the gap between the federal funds rate target and the discount rate at 50 basis points. The Committee's statement noted that incoming information suggested that economic growth was slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending. Moreover, strains in financial markets had increased in recent weeks. The Committee indicated that its action, combined with the policy actions taken earlier, should help promote moderate growth over time. Readings on core inflation had improved modestly during the year, but elevated energy and commodity prices, among other factors, might put upward pressure on inflation. In this context, the Committee judged that some inflation risk remained and said that it would continue to monitor inflation developments carefully. Recent developments, including the deterioration in financial market conditions, had increased the uncertainty surrounding the outlook for economic growth and inflation. The Committee stated that it would continue to assess the effects of financial and other developments on economic prospects and would act as needed to foster price stability and sustainable economic growth. Over the intermeeting period, the expected path of monetary policy over the next year as measured by money market futures rates tilted down sharply, primarily in response to softer-than-expected economic data releases. The Committee's action at its December meeting was largely anticipated by market participants, although some investors were surprised by the absence of any indication of accompanying measures to address strains in term funding markets. Some of that surprise was reversed the next day, following the announcement of a Term Auction Facility (TAF) and associated swap lines with the European Central Bank and the Swiss National Bank. The subsequent release of the minutes of the meeting elicited little market reaction. However, investors did mark down the expected path of policy in response to speeches by Federal Reserve officials; the speeches were interpreted as suggesting that signs of broader economic weakness and additional financial strains would likely require an easier stance of policy. The Committee's decision to reduce the target federal funds rate 75 basis points on January 22 surprised market participants and led investors to mark down further the path of policy over the next few months. Consistent with the shift in the economic outlook, the revision in policy expectations, and the reduction in the target federal funds rate, yields on nominal Treasury coupon securities declined substantially over the period since the December FOMC meeting. The yield curve steepened somewhat further, with the two-year yield dropping more than the ten-year yield. Near-term inflation compensation increased in early January amid rising oil prices, but it retreated in later weeks, along with oil prices, and declined, on net, over the period. Conditions in short-term funding markets improved notably over the intermeeting period, but strains remained. Spreads of rates on securities in interbank funding markets over risk-free rates narrowed somewhat following the announcement of the TAF on December 12 and eased considerably after year-end, although they remained at somewhat elevated levels. Spreads of rates on asset-backed commercial paper over risk-free rates also fell, on net, and the level of such paper outstanding increased in the first two weeks of January for the first time since August. In longer-term corporate markets, yields on investment-grade corporate bonds fell less than those on comparable-maturity Treasury securities, while yields on speculative-grade bonds rose considerably. As a result, corporate bond spreads climbed to their highest levels since early 2003, apparently reflecting increased concern among investors about the outlook for corporate credit quality over the next few years. Nonetheless, gross bond issuance in December remained strong. Commercial bank credit expanded briskly in December, supported by robust growth in business loans and in nonmortgage loans to households, and in the face of survey reports of tighter lending conditions. Over the intermeeting period, spreads on conforming mortgages over comparable-maturity Treasury securities remained about flat, as did spreads on jumbo mortgages, although credit availability for jumbo-mortgage borrowers continued to be tight. Broad stock price indexes fell over the intermeeting period on perceptions of a deteriorating economic outlook and additional write-downs by financial institutions. Similar stresses were again evident in the financial markets of major foreign economies. The trade-weighted foreign exchange value of the dollar against major currencies declined slightly, on balance, over the intermeeting period. Debt in the domestic nonfinancial sector was estimated to have increased somewhat more slowly in the fourth quarter than in the third. The rate of increase of nonfinancial business debt decelerated in the fourth quarter from its rapid third-quarter pace despite robust bond issuance as the rise in commercial and industrial lending moderated. Household mortgage debt expanded at a slow rate in the fourth quarter, reflecting continued weakness in home prices, declining home sales, and tighter credit conditions for some borrowers. Nonmortgage consumer credit appeared to expand at a moderate pace. In December, the increase in M2 was up slightly from its November pace, boosted primarily by inflows into the relative safety and liquidity of money market mutual funds. The rise in small time deposits moderated but remained elevated, as several thrift institutions offered attractive deposit rates to secure funding. In contrast, liquid deposits continued to increase weakly and currency contracted noticeably, the latter apparently reflecting an ongoing trend in overseas demand away from U.S. dollar bank notes and towards the euro and other currencies. In the forecast prepared for this meeting, the staff revised up slightly its estimated increase in aggregate economic activity in the fourth quarter of 2007 but revised down its projected increase for the first half of 2008. Although data on consumer spending and nonresidential construction activity for the fourth quarter had come in above the staff's expectations, most of the information received over the intermeeting period was weaker than had been previously expected. The drop in housing activity continued to intensify, conditions in labor markets appeared to have deteriorated noticeably near year-end, and factory output had weakened. Consumer confidence remained low, and indicators of business sentiment had worsened. Equity prices had also fallen sharply so far in 2008, and, while the functioning of money markets had improved, conditions in some other financial markets had become more restrictive. The staff projection showed the weakness in spending dissipating over the second half of 2008 and 2009, in response to the cumulative easing of monetary policy since August, the abatement of housing weakness, a lessening drag from high oil prices, and the prospect of fiscal stimulus. Still, projected resource utilization was lower over the next two years than in the previous forecast. The projection for core PCE price inflation in 2008 was raised slightly in response to elevated readings in recent months. The forecast for headline PCE price inflation also incorporated a somewhat higher rate of increase for energy prices for the first half of 2008; as a result, headline PCE price inflation was now expected to exceed core PCE price inflation slightly for that year. The forecasts for both headline and core PCE price inflation for 2009 were unchanged, with both receding from their 2008 levels. In conjunction with the FOMC meeting in January, all meeting participants (Federal Reserve Board members and Reserve Bank presidents) provided annual projections for economic growth, unemployment, and inflation for the period 2008 through 2010. The projections are described in the Summary of Economic Projections, which is attached as an addendum to these minutes. In their discussion of the economic situation and outlook, and in the projections that they had submitted for this meeting, participants noted that information received since the December meeting had been decidedly downbeat on balance. In particular, the drop in housing activity had intensified, factory output had weakened, news on business investment had been soft, and conditions in labor markets appeared to have deteriorated. In addition, consumer confidence had remained low and business confidence appeared to have worsened. Although the functioning of money markets had improved notably, strains remained evident in a number of other financial markets, and credit conditions had become generally more restrictive. Against this backdrop, participants expected economic growth to remain weak in the first half of this year before picking up in the second half, aided in part by a more accommodative stance of monetary policy and by likely fiscal stimulus. Further ahead, participants judged that economic growth would continue to pick up gradually in 2009 and 2010. Nonetheless, with housing activity and house prices still declining and with financial conditions for businesses and households tightening further, significant uncertainties surrounded this outlook and the risks to economic growth in the near term appeared to be weighted to the downside. Indeed, several participants noted that the risks of a downturn in the economy were significant. Inflation data had been disappointing in recent months, and a few participants cited anecdotal reports that some firms were able to pass on costs to consumers. However, with inflation expectations anticipated to remain reasonably well anchored, energy and other commodity prices expected to flatten out, and pressures on resources likely to ease, participants generally expected inflation to moderate somewhat in coming quarters. Meeting participants observed that conditions in short-term funding markets had improved considerably since the December meeting, reflecting the easing of pressures related to funding around the turn of the year as well as the implementation of the TAF. However, broader financial conditions had tightened significantly, on balance, in the weeks leading up to the meeting, as evidence of further deterioration in housing markets and investors' more pessimistic view of the economic outlook adversely affected a range of financial markets. Many participants were concerned that the drop in equity prices, coupled with the ongoing decline in house prices, implied reductions in household wealth that would likely damp consumer spending. Moreover, elevated volatility in financial markets likely reflected increased uncertainty about the economic outlook, and that greater uncertainty could lead firms and households to limit spending. The availability of credit to consumers and businesses appeared to be tightening, likely adding to restraint on economic growth. Participants discussed the risks to financial markets and institutions posed by possible further deterioration in the condition of financial guarantors, and many perceived a possibility that additional downgrades in these firms' credit ratings could put increased strains on financial markets. To be sure, some positive financial developments were evident. Banks appeared to be making some progress in strengthening their balance sheets, with several financial institutions able to raise significant amounts of capital to offset the large losses they had suffered in recent quarters. Nevertheless, participants generally viewed financial markets as still vulnerable to additional economic and credit weakness. Some noted the especially worrisome possibility of an adverse feedback loop, that is, a situation in which a tightening of credit conditions could depress investment and consumer spending, which, in turn, could feed back to a further tightening of credit conditions. In their discussion of individual sectors of the economy, meeting participants emphasized that activity in housing markets had continued to deteriorate sharply. With single-family permits and starts still falling, sales of new homes dropping precipitously, sales of existing homes flat, and inventories of unsold homes remaining elevated even in the face of falling house prices, several participants noted the absence of signs of stabilization in the sector. Of further concern were the reduced availability of nonconforming loans and the apparent tightening by banks of credit standards on mortgages, both of which had the potential for intensifying the housing contraction. The recent declines in interest rates had spurred a surge in applications for mortgage refinancing and would limit the upward resets on the rates on outstanding adjustable-rate mortgages, both of which would tend to improve some households' finances. Nonetheless, participants viewed the housing situation and its potential further effect on employment, income, and wealth as one of the major sources of downside risk to the economic outlook. Recent data as well as anecdotal information indicated that consumer spending had decelerated considerably, perhaps partly reflecting a spillover from the weakness in the housing sector. Participants remarked that declining house prices and sales appeared to be depressing consumer sentiment and that the contraction in wealth associated with decreases in home and equity prices probably was restraining spending. In addition, consumption expenditures were being damped by slower growth in real disposable income induced by high energy prices and possibly by a softening of the labor market. The December employment report showed that job growth had slowed appreciably, and other indicators also pointed to emerging weakness in the labor market in the intermeeting period. And spending in the future could be affected by an ongoing tightening in the availability of consumer credit amid signs that lenders were becoming increasingly cautious in view of some deterioration of credit performance on consumer loans and widening expectations of slower income growth. Some participants, however, cited evidence that workers in some sectors were still in short supply and saw signs that the labor market remained resilient. The outlook for business investment had turned weaker as well since the time of the December meeting. Several participants reported that firms in their districts were reducing capital expenditures in anticipation of a slowing in sales. Manufacturing activity appeared to have slowed or contracted in many districts. Although a few participants reported more upbeat attitudes among firms in the technology and energy sectors, business sentiment overall appeared to be declining. Moreover, a number of indicators pointed to a tightening in credit availability to businesses. For example, the Senior Loan Officer Opinion Survey on Bank Lending Practices indicated that banks had tightened lending standards and pricing terms on business loans. Lending standards had been raised especially sharply on commercial real estate loans. While real outlays for nonresidential construction apparently continued to rise through the fourth quarter, anecdotal evidence pointed to a weakening of commercial real estate spending in several districts, with some projects being canceled or scaled back. Most participants anticipated that a fiscal stimulus package, including tax rebates for households and bonus depreciation allowances for businesses, would be enacted before long and would support economic growth in the second half of the year. Some pointed out, however, that the fiscal stimulus package might not help in the near term, when the risks of a downturn in economic activity appeared largest. In addition, the effects of the proposed package would likely be temporary, with the stimulus reversing in 2009. With regard to the external sector, some participants noted that growth abroad had recently been strong and that increasing U.S. exports had been a significant source of strength for the U.S. economy of late. However, available data suggested that economic activity outside the United States appeared to be decelerating somewhat. Although slowing foreign growth would reduce a source of support for the U.S. economy at the same time that domestic spending was slackening, it could also damp commodity prices and help reduce global price pressures. Participants agreed that the inflation data that were received since the December meeting had been disappointing. But many believed that the slow growth in economic activity anticipated for the first half of this year and the associated slack in resource utilization would contribute to an easing of price pressures. Moreover, a leveling-off of energy and commodity prices such as that embedded in futures markets would also help moderate inflation pressures. However, some participants cautioned that commodity prices had remained stubbornly high for quite some time and that inferences drawn in the past from futures markets about likely trends in such prices had often proven inaccurate. Participants also related anecdotal evidence of firms facing increasing input cost pressures and in some cases being able to pass on those costs to consumers. Moreover, headline inflation had been generally above 2 percent over the past four years, and participants noted that such persistently elevated readings could ultimately affect inflation expectations. Some survey measures of inflation expectations had edged up in recent months, and longer-term financial market gauges of inflation compensation had climbed. The latter probably reflected at least in part increased uncertainty--inflation risk--rather than greater inflation expectations; increases in nominal wages did not appear to be incorporating higher inflation expectations. On balance, expectations seemed to remain fairly well anchored, but participants agreed that continued stability of inflation expectations was essential. In the discussion of monetary policy for the intermeeting period, most members believed that a further significant easing in policy was warranted at this meeting to address the considerable worsening of the economic outlook since December as well as increased downside risks. As had been the case in some previous cyclical episodes, a relatively low real federal funds rate now appeared appropriate for a time to counter the factors that were restraining economic growth, including the slide in housing activity and prices, the tightening of credit availability, and the drop in equity prices. Members judged that a 50 basis point reduction in the federal funds rate, together with the Committee's previous policy actions, would bring the real short-term rate to a level that was likely to help the economy expand at a moderate pace over time. Still, with no signs of stabilization in the housing sector and with financial conditions not yet stabilized, the Committee agreed that downside risks to growth would remain even after this action. Members were also mindful of the need for policy to promote price stability, and some noted that, when prospects for growth had improved, a reversal of a portion of the recent easing actions, possibly even a rapid reversal, might be appropriate. However, most members agreed that a 50 basis point easing at this meeting would likely not contribute to an increase in inflation pressures given the actual and expected weakness in economic growth and the consequent reduction in pressures on resources. Rather, members agreed that inflation was likely to moderate in coming quarters, but they also concurred that it would be necessary to continue to monitor inflation developments carefully. The Committee agreed that the statement to be released after the meeting should indicate that financial markets remained under considerable stress, that credit had tightened further for some businesses and households, and that recent information pointed to a deepening of the housing contraction as well as to some softening in labor markets. The Committee again viewed it as appropriate to indicate that it expected inflation to moderate in coming quarters but also to emphasize that it would be necessary to monitor inflation developments carefully. The action taken at the meeting, combined with the cumulative policy easing already in place, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, members concurred that downside risks to growth remained, and that the Committee would continue to assess the effects of financial and other developments on economic prospects and would act in a timely manner as needed to address those risks. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: “The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output.  To further its long-run objectives, the Committee in the immediate future seeks conditions in reserve markets consistent with reducing the federal funds rate to an average of around 3 percent.” The vote encompassed approval of the statement below to be released at 2:15 p.m.: “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.” Votes for this action: Messrs. Bernanke, Geithner, Kohn, Kroszner, and Mishkin, Ms. Pianalto, Messrs. Plosser, Stern, and Warsh. Votes against this action: Mr. Fisher. Mr. Fisher dissented because he preferred to leave the federal funds rate unchanged. The rate had been lowered by 75 basis points just one week earlier in a decision he supported, which brought the funds rate down 175 basis points since September. Given these actions, he felt that monetary policy was already quite stimulative, while headline inflation was too high at more than 3 percent over the last year. Demand-pull inflation pressures from emerging-market economies abroad appeared to be continuing, and anecdotal reports from business contacts suggested greater willingness domestically to pass rising costs through to prices. Moreover, Mr. Fisher was concerned that inflation expectations could become unanchored if the perception of negative real rates of interest were to become pervasive. At the same time, the economy appeared to be still growing, albeit at a substantially weakened pace. Given the policy tradeoffs confronting the FOMC at this time, Mr. Fisher saw the upside risks to inflation as being greater than the downside risks to longer-term economic growth, especially in light of the recent, aggressive easing of monetary policy and the lag before it would have its full effect on the economy. The Committee then turned to a discussion of selected longer-term regulatory and structural issues raised by recent financial market developments. A staff presentation began by noting that the difficulties in financial markets started with unexpectedly heavy losses on subprime mortgages and related structured securities, which led investors to question the valuations of complex structured instruments more generally and to pull back from such investments. The resulting effects in markets put pressure on some large banking organizations, particularly through losses on subprime-mortgage-related securities and other assets, and through the unplanned expansion of balance sheets triggered by the disruption of various markets in which assets were securitized. The remainder of the presentation, and the discussion by meeting participants, focused on two issues: first, the important role of credit ratings in the securitization process, including the methods used to set ratings and the way investors use ratings in making their investment decisions; and second, how weaknesses in risk management practices at some large global financial services organizations appear to have led to outsized losses at those institutions, and the reasons that such weaknesses may have emerged at some firms and not at others. It was agreed that the next meeting of the Committee would be held on Tuesday, March 18, 2008. The meeting adjourned at 1:15 p.m. Notation VoteBy notation vote completed on December 31, 2007, the Committee unanimously approved the minutes of the FOMC meeting held on December 11, 2007. Conference CallsOn January 9, 2008, the Committee reviewed recent economic data and financial market developments. The available information suggested that the downside risks to growth had increased significantly since the time of the December FOMC meeting. Participants discussed the possibility that the slowing in economic growth and associated softening in labor markets might exacerbate the tightening in credit conditions and the correction in housing market activity and prices, which could in turn weigh further on economic activity. Participants emphasized the risks that such adverse dynamics could pose to economic and financial stability. Participants noted that core price inflation had edged up in recent months, boosted in part by the pass-through of higher energy costs to the prices of core consumer goods and services. Inflation was expected to edge lower this year as energy prices leveled off and pressures on resources eased. However, this slowing in inflation was dependent on inflation expectations remaining well anchored, and participants noted that considerable uncertainty surrounded the inflation outlook. Most participants were of the view that substantial additional policy easing in the near term might well be necessary to promote moderate economic growth over time and to reduce the downside risks to growth, and participants discussed the possible timing of such policy actions. On January 21, 2008, the Committee again met by conference call. Incoming information since the conference call on January 9 had reinforced the view that the outlook for economic activity was weakening. Among other developments, strains in some financial markets had intensified, as it appeared that investors were becoming increasingly concerned about the economic outlook and the downside risks to activity. Participants discussed the possibility that these developments could lead to an excessive pull-back in credit availability and in investment. Although inflation was expected to moderate from recent elevated levels, participants stressed that this outlook relied upon inflation expectations remaining well anchored and that the inflation situation should continue to be monitored carefully. All members judged that a substantial easing in policy in the near term was appropriate to foster moderate economic growth and reduce the downside risks to economic activity. Most members judged that an immediate reduction in the federal funds rate was called for to begin aligning the real policy rate with a weakening economic situation. Such an action, by demonstrating the Committee's commitment to act decisively to support economic activity, might reduce concerns about economic prospects that seemed to be contributing to the deteriorating conditions in financial markets, which could feed back on the economy. However, some concern was expressed that an immediate policy action could be misinterpreted as directed at recent declines in stock prices, rather than the broader economic outlook, and one member believed it preferable to delay policy action until the scheduled FOMC meeting on January 29-30. Some members also noted that were policy to become very stimulative it would be important for the Committee to be decisive in reversing the course of interest rates once the economy had strengthened and downside risks had abated. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee in the immediate future seeks conditions in reserve markets consistent with reducing the federal funds rate to an average of around 3-1/2 percent." The vote encompassed approval of the text below for inclusion in the statement to be released at 8:30 a.m. on Tuesday, January 22: “The Federal Open Market Committee has decided to lower its target for the federal funds rate 75 basis points to 3-1/2 percent. The Committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth. While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming 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. Appreciable 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.” Votes for this action: Messrs. Bernanke, Geithner, Evans, Hoenig, Kohn, Kroszner, Rosengren, and Warsh. Votes against this action: Mr. Poole Absent and not voting: Mr. Mishkin Mr. Poole dissented because he did not believe that current conditions justified policy action before the regularly scheduled meeting the following week. _____________________________ Brian F. MadiganSecretary Return to top

2007-12-11

Statement

The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 4-1/4 percent. Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending. Moreover, strains in financial markets have increased in recent weeks.  Today’s action, combined with the policy actions taken earlier, should help promote moderate growth over time. Readings on core inflation have improved modestly this year, but elevated energy and commodity prices, among other factors, may put upward pressure on inflation.  In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully. Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation.  The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth. Voting for the FOMC monetary policy action were:  Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; William Poole; and Kevin M. Warsh.  Voting against was Eric S. Rosengren, who preferred to lower the target for the federal funds rate by 50 basis points at this meeting. In a related action, the Board of Governors unanimously approved a 25-basis-point decrease in the discount rate to 4-3/4 percent.  In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, and St. Louis.

2008-01-02

Minute

A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, December 11, 2007, at 8:00 a.m. PRESENT:Mr. Bernanke, ChairmanMr. Geithner, Vice ChairmanMr. EvansMr. HoenigMr. KohnMr. KrosznerMr. MishkinMr. PooleMr. RosengrenMr. Warsh Ms. Cumming, Mr. Fisher, Ms. Pianalto, and Messrs. Plosser and Stern, Alternate Members of the Federal Open Market CommitteeMessrs. Lacker and Lockhart, and Ms. Yellen, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco, respectively Mr. Madigan, Secretary and Economist Ms. Danker, Deputy Secretary Ms. Smith, Assistant Secretary Mr. Skidmore, Assistant Secretary Mr. Alvarez, General Counsel Mr. Baxter, Deputy General Counsel Mr. Sheets, Economist Mr. Stockton, Economist Messrs. Clouse, Connors, Fuhrer, Kamin, Rasche, Sellon, Slifman, Sullivan, and Wilcox, Associate Economists Mr. Dudley, Manager, System Open Market Account Mr. Struckmeyer, Deputy Staff Director, Office of Staff Director for Management Mr. English, Senior Associate Director, Division of Monetary Affairs, Board of Governors Ms. Liang and Mr. Wascher, Associate Directors, Division of Research and Statistics, Board of Governors Mr. Blanchard, Assistant to the Board, Office of Board Members, Board of Governors Mr. Meyer, Visiting Reserve Bank Officer, Division of Monetary Affairs, Board of Governors Mr. Small, Project Manager, Division of Monetary Affairs, Board of Governors Mr. Luecke, Senior Financial Analyst, Division of Monetary Affairs, Board of Governors Ms. Low, Open Market Secretariat Specialist, Division of Monetary Affairs, Board of Governors Mr. Barron, First Vice President, Federal Reserve Bank of Atlanta Mr. Rosenblum, Executive Vice President, Federal Reserve Bank of Dallas Mr. Altig, Ms. Perelmuter, Messrs. Rolnick, Weinberg, and Williams, Senior Vice Presidents, Federal Reserve Banks of Atlanta, New York, Minneapolis, Richmond, and San Francisco, respectively Messrs. Bryan and Yi, Vice Presidents, Federal Reserve Banks of Cleveland and Philadelphia, respectively Mr. McCarthy, Research Officer, Federal Reserve Bank of New York The Manager of the System Open Market Account reported on recent developments in foreign exchange markets. There were no open market operations in foreign currencies for the System's account in the period since the previous meeting. The Manager also reported on developments in domestic financial markets and on System open market operations in government securities and federal agency obligations during the period since the previous meeting. By unanimous vote, the Committee ratified these transactions. The Committee approved a foreign currency swap arrangement with the Swiss National Bank that paralleled the arrangement with the European Central Bank approved during the Committee's conference call on December 6, 2007. With Mr. Poole dissenting, the Committee voted to direct the Federal Reserve Bank of New York to establish and maintain a reciprocal currency (swap) arrangement for the System Open Market Account with the Swiss National Bank in an amount not to exceed $4 billion. The Committee authorized associated draws of up to the full amount of $4 billion, and the arrangement itself was authorized for a period of up to 180 days unless extended by the FOMC. Mr. Poole dissented because he viewed the swap agreement as unnecessary in light of the size of the Swiss National Bank's dollar-denominated foreign exchange reserves. The information reviewed at the December meeting indicated that, after the robust gains of the summer, economic activity decelerated significantly in the fourth quarter. Consumption growth slowed, and survey measures of sentiment dropped further. Many readings from the business sector were also softer:  Industrial production fell in October, as did orders and shipments of capital goods. Employment gains stepped down during the four months ending in November from their pace earlier in the year. Headline consumer price inflation moved higher in September and October as energy prices increased significantly; core inflation also rose but remained moderate. The slowing in private employment gains was due in large part to the ongoing weakness in the housing market. Employment in residential construction posted its fourth month of sizable declines in November, and employment in housing-related sectors such as finance, real estate, and building-material and garden-supply retailers continued to trend down. Elsewhere, factory jobs declined again, while employment in most service-producing industries continued to move up. Aggregate hours of production or nonsupervisory workers edged up in October and November. Some indicators from the household survey also suggested softening in the labor market, but the unemployment rate held steady at 4.7 percent through November. Industrial production fell in October after small increases in the previous two months. The index for motor vehicles and parts fell for the third consecutive month, and the index for construction supplies moved down for the fourth straight month. Materials output also declined in October, with production likely curbed by weak demand from the construction and motor vehicle sectors. Production in high-tech industries, however, increased modestly, and commercial aircraft production registered another solid gain. In November, output appeared to have edged up in manufacturing sectors (with the exception of the motor vehicles sector) for which weekly physical product data were available. After posting notable gains in the summer, real consumer spending was nearly flat in September and October. Spending on goods excluding motor vehicles was little changed on net over that period. Spending on services edged down, reflecting an extraordinarily large drop in securities commissions in September. The most recent readings on weekly chain store sales as well as industry reports and surveys suggested subdued gains in November and an uneven start to the holiday shopping season. Sales of light motor vehicles in November remained close to the pace that had prevailed since the second quarter. Real disposable income was about unchanged in September and October. The Reuters/University of Michigan index of consumer sentiment ticked down further in early December as respondents took a more pessimistic view of the outlook for their personal finances and for business conditions in the year ahead. In the housing market, new home sales were below their third-quarter pace, and sales of existing homes were flat in October following sharp declines in August and September. These declines likely were exacerbated by the deterioration in nonprime mortgage markets and by the higher interest rates and tighter lending conditions for jumbo loans. Single-family housing starts stepped down again in October after substantial declines in the June-September period. Yet, because of sagging sales, builders made only limited progress in paring down their substantial inventories. Single-family permit issuance continued along the steep downward trajectory that had begun two years earlier, which pointed toward further slowing in homebuilding over the near term. Multifamily starts rebounded in October from an unusually low reading in September, and the level of multifamily starts was near the midpoint of the range in which this series had fluctuated over the past ten years. Real spending on equipment and software posted a solid increase in the third quarter. In October, however, orders and shipments of nondefense capital goods excluding aircraft declined, suggesting that some deceleration in spending was under way in the fourth quarter. The October decline in orders and shipments was led by weakness in the high-tech sector:  Shipments of computers and peripheral equipment declined while the industrial production index for computers was flat; orders and shipments for communications equipment plunged. Some of that weakness may have been attributable to temporary production disruptions stemming from the wildfires in Southern California; cutbacks in demand from large financial institutions affected by market turmoil may have contributed as well. In the transportation equipment category, purchases of medium and heavy trucks changed little, and orders data suggested that sales would remain near their current levels in the coming months. Orders for equipment outside high-tech and transportation rose in October, but shipments were about flat, pointing to a weaker fourth quarter for business spending after two quarters of brisk increases. Some prominent surveys of business conditions remained consistent with modest gains in spending on equipment and software during the fourth quarter, but other surveys were less sanguine. In addition, although the cost of capital was little changed for borrowers in the investment-grade corporate bond market, costs for borrowers in the high-yield corporate bond market were up significantly. In the third quarter, corporate cash flows appeared to have dropped off, leaving firms with diminished internally generated funds for financing investment. Data available through October suggested that nonresidential building activity remained vigorous. Real nonfarm inventory investment excluding motor vehicles increased slightly faster in the third quarter than in the second quarter. Outside of motor vehicles, the ratio of book-value inventories to sales had ticked up slightly in September but remained near the low end of its range in recent years. Book-value estimates of the inventory investment of manufacturers--the only inventory data available beyond the third quarter--were up in October at about the third-quarter pace. The U.S. international trade deficit narrowed slightly in September as an increase in exports more than offset higher imports. The September gain in exports primarily reflected higher exports of goods; services exports recorded moderate growth. Exports of agricultural products exhibited particularly robust growth, with both higher prices and greater volumes. Exports of industrial supplies and consumer goods also moved up smartly in September. Automotive products exports, in contrast, were flat, and capital goods exports fell, led by a decline in aircraft. The increase in imports primarily reflected higher imports of capital goods, with imports of computers showing particularly strong growth. Imports of automotive products, consumer goods, and services also increased. Imports of petroleum, however, were flat, and imports of industrial supplies fell. Output growth in the advanced foreign economies picked up in the third quarter. In Japan, real output rebounded, led by exports. In the euro area, GDP growth returned to a solid pace in the third quarter on the back of a strong recovery in investment. In Canada and the United Kingdom, output growth moderated but remained robust, as vigorous domestic demand was partly offset by rapid growth of imports. Indicators of fourth-quarter activity in the advanced foreign economies were less robust on net. Confidence indicators had deteriorated in most major economies in the wake of the financial turmoil and remained relatively weak. In November, the euro-area and U.K. purchasing managers indexes for services were well below their level over the first half of the year; nevertheless they pointed to moderate expansion. Labor market conditions generally remained relatively strong in recent months. Incoming data on emerging-market economies were positive on balance. Overall, growth in emerging Asia moderated somewhat in the third quarter from its double-digit pace in the second quarter, but remained strong. Economic growth was also solid in Latin America, largely reflecting stronger-than-expected activity in Mexico. In the United States, headline consumer price inflation increased in September and October from its low rates in the summer as the surge in crude oil prices began to be reflected in retail energy prices. In addition, though the rise in food prices in October was slower than in August and September, it remained above that of core consumer prices. Excluding food and energy, inflation was moderate, although it was up from its low rates in the spring. The pickup in core consumer inflation over this period reflected an acceleration in some prices that were unusually soft last spring, such as those for apparel, prescription drugs, and medical services, as well as nonmarket prices. On a twelve-month-change basis, core consumer price inflation was down noticeably from a year earlier. In October, the producer price index for core intermediate materials moved up only slightly for a second month, and the twelve-month increase in these prices was considerably below that of the year-earlier period. This pattern reflected, in part, a deceleration in the prices of a wide variety of construction materials, such as cement and gypsum, and in the prices of some metal products. In response to rising energy prices, household survey measures of expectations for year-ahead inflation picked up in November and then edged higher in December. Households' longer-term inflation expectations also edged up in both November and December. Average hourly earnings increased faster in November than in the previous two months. Over the twelve months that ended in November, however, this wage measure rose a bit more slowly than over the previous twelve months. At its October meeting, the FOMC lowered its target for the federal funds rate 25 basis points, to 4-1/2 percent. The Board of Governors also approved a 25 basis point decrease in the discount rate, to 5 percent, leaving the gap between the federal funds rate target and the discount rate at 50 basis points. The Committee's statement noted that, while economic growth was solid in the third quarter and strains in financial markets had eased somewhat on balance, the pace of economic expansion would likely slow in the near term, partly reflecting the intensification of the housing correction. The Committee indicated that its action, combined with the policy action taken in September, should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and should promote moderate growth over time. Readings on core inflation had improved modestly during the year, but the statement noted that recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation. In this context, the Committee judged that some inflation risks remained and indicated that it would continue to monitor inflation developments carefully. The Committee also judged that, after this action, the upside risks to inflation roughly balanced the downside risks to growth. The Committee said that it would continue to assess the effects of financial and other developments on economic prospects and would act as needed to foster price stability and sustainable economic growth. The Committee's action at its October meeting was largely expected by market participants, although the assessment that the upside risks to inflation balanced the downside risks to growth was not fully anticipated and apparently led investors to revise up slightly the expected path for policy. During the intermeeting period, the release of the FOMC minutes and associated summary of economic projections, as well as various data releases, elicited only modest market reaction. In contrast, markets were buffeted by concerns about the potential adverse effects on credit availability and economic growth of sizable losses at large financial institutions and of financial market strains in general. Market participants marked down their expected path for policy substantially, and by the time of the December meeting, investors were virtually certain of a rate cut. Two-year Treasury yields fell on net over the intermeeting period by an amount about in line with revisions to policy expectations. Ten-year Treasury yields also declined, but less than shorter-term yields. The steepening of the yield curve was due mostly to sharply lower short- and intermediate-term forward rates, consistent with investors' apparently more pessimistic outlook for economic growth. TIPS yields fell less than their nominal counterparts, implying modest declines in inflation compensation both at the five-year and longer horizons. After showing some signs of improvement in late September and October, conditions in financial markets worsened over the intermeeting period. Heightened worries about counterparty credit risk, balance sheet constraints, and liquidity pressures affected interbank funding markets and commercial paper markets, where spreads over risk-free rates rose to levels that were, in some cases, higher than those seen in August. Strains in those markets were exacerbated by concerns related to year-end pressures. In longer-term corporate markets, both investment- and speculative-grade credit spreads widened considerably; issuance slowed but remained strong. In housing finance, subprime mortgage markets stayed virtually shut, and spreads on jumbo loans apparently widened further. Spreads on conforming mortgage products also widened after reports of losses and reduced capital ratios at the housing-related government-sponsored enterprises. Broad-based equity indexes were volatile and ended the period down noticeably. Financial stocks were especially hard hit, dropping substantially more than the broad indexes. Similar stresses were evident in the financial markets of major foreign economies. The trade-weighted foreign exchange value of the dollar against major currencies moved up, on balance, over the intermeeting period. Debt in the domestic nonfinancial sector was estimated to be increasing somewhat more slowly in the fourth quarter than in the third quarter. Nonfinancial business debt continued to expand strongly, supported by solid bond issuance and by a small rebound in the issuance of commercial paper. Bank loans outstanding also continued to rise rapidly. Household mortgage debt was expected to expand at a reduced rate in the fourth quarter, reflecting softer home prices and declining home sales, as well as a tightening in credit conditions for some borrowers. Nonmortgage consumer credit in the fourth quarter appeared to be expanding at a moderate pace. In November, M2 growth picked up slightly from its October rate. While liquid deposits continued to grow slowly, heightened demand for safety and liquidity appeared to boost holdings of retail money market mutual funds. Small time deposits continued to expand, likely in part due to high rates offered by some depository institutions to attract retail deposits. Currency outstanding was about flat in November. In the forecast prepared for this meeting, the staff revised down its estimate of growth in aggregate economic activity in the fourth quarter. Although third-quarter real GDP was revised up sharply, most available indicators of activity in the fourth quarter were more downbeat than had previously been expected. Faster inventory investment contributed importantly to the upward revision to third-quarter real GDP, but part of that upswing was expected to be unwound in the fourth quarter. The available data for domestic final sales also suggested a weaker fourth quarter than had been anticipated. In particular, real personal consumption expenditures had been about unchanged in September and October, and the contraction in single-family construction had intensified. Providing a bit of an offset to these factors, however, was further improvement in the external sector. The staff also marked down its projection for the rise in real GDP over the remainder of the forecast period. Real GDP was anticipated to increase at a rate noticeably below its potential in 2008. Conditions in financial markets had deteriorated over the intermeeting period and were expected to impose more restraint on residential construction as well as consumer and business spending in 2008 than previously expected. In addition, compared with the previous forecast, higher oil prices and lower real income were expected to weigh on the pace of real activity throughout 2008 and 2009. By 2009, however, the staff projected that the drag from those factors would lessen and that an improvement in mortgage credit availability would lead to a gradual recovery in the housing market. Accordingly, economic activity was expected to increase at its potential rate in 2009. The external sector was projected to continue to support domestic economic activity throughout the forecast period. Reflecting upward revisions to previously published data, the forecast for core PCE price inflation for 2007 was a bit higher than in the preceding forecast; core inflation was projected to hold steady during 2008 as the indirect effects of higher energy prices on prices of core consumer goods and services were offset by the slight easing of resource pressures and the expected deceleration in the prices of nonfuel imported goods. The forecast for headline PCE inflation anticipated that retail energy prices would rise sharply in the first quarter of 2008 and that food price inflation would outpace core price inflation in the beginning of the year. As pressures from these sources lessened over the remainder of 2008 and in 2009, both core and headline price inflation were projected to edge down, and headline inflation was expected to moderate to a pace slightly below core inflation. In their discussion of the economic situation and outlook, participants generally noted that incoming information pointed to a somewhat weaker outlook for spending than at the time of the October meeting. The decline in housing had steepened, and consumer outlays appeared to be softening more than anticipated, perhaps indicating some spillover from the housing correction to other components of spending. These developments, together with renewed strains in financial markets, suggested that growth in late 2007 and during 2008 was likely to be somewhat more sluggish than participants had indicated in their October projections. Still, looking further ahead, participants continued to expect that, aided by an easing in the stance of monetary policy, economic growth would gradually recover as weakness in the housing sector abated and financial conditions improved, allowing the economy to expand at about its trend rate in 2009. Participants thought that recent increases in energy prices likely would boost headline inflation temporarily, but with futures prices pointing to a gradual decline in oil prices and with pressures on resource utilization seen as likely to ease a bit, most participants continued to anticipate some moderation in core and especially headline inflation over the next few years. Participants discussed in detail the resurgence of stresses in financial markets in November. The renewed stresses reflected evidence that the performance of mortgage-related assets was deteriorating further, potentially increasing the losses that were being borne in part by a number of major financial firms, including money-center banks, housing-related government-sponsored enterprises, investment banks, and financial guarantors. Moreover, participants recognized that some lenders might be exposed to additional losses:  Delinquency rates on credit card loans, auto loans, and other forms of consumer credit, while still moderate, had increased somewhat, particularly in areas hard hit by house price declines and mortgage defaults. Past and prospective losses appeared to be spurring lenders to tighten further the terms on new extensions of credit, not just in the troubled markets for nonconforming mortgages but, in some cases, for other forms of credit as well. In addition, participants noted that some intermediaries were facing balance sheet pressures and could become constrained by concerns about rating-agency or regulatory capital requirements. Among other factors, banks were experiencing unanticipated growth in loans as a result of continuing illiquidity in the market for leveraged loans, persisting problems in the commercial paper market that had sparked draws on back-up lines of credit, and more recently, consolidation of assets of off-balance-sheet affiliates onto banks' balance sheets. Concerns about credit risk and the pressures on banks' balance sheet capacity appeared to be contributing to diminished liquidity in interbank markets and to a pronounced widening in term spreads for periods extending through year-end. A number of participants noted some potential for the Federal Reserve's new Term Auction Facility and accompanying actions by other central banks to ameliorate pressures in term funding markets. Participants recognized, however, that uncertainties about values of mortgage-related assets and related losses, and consequently strains in financial markets, could persist for quite some time. Some participants cited more-positive aspects of recent financial developments. A number of large financial intermediaries had been able to raise substantial amounts of new capital. Moreover, credit losses and asset write-downs at regional and community banks had generally been modest; these institutions typically were not facing balance sheet pressures and reportedly had not tightened lending standards appreciably, except for those on real estate loans. And, although spreads on corporate bonds had widened over the intermeeting period, especially for speculative-grade issues, the cost of credit to most nonfinancial firms remained relatively low; nonfinancial firms outside of the real estate and construction sectors generally reported that credit conditions, while somewhat tighter, were not restricting planned investment spending; and consumer credit remained readily available for most households. Nonetheless, participants agreed that heightened financial stress posed increased downside risks to growth and made the outlook for the economy considerably more uncertain. Participants noted the marked deceleration in consumer spending in the national data. Real personal consumption expenditures had shown essentially no growth in September and October, suggesting that tighter credit conditions, higher gasoline prices, and the continuing housing correction might be restraining growth in real consumer spending. Retailers reported weaker results in many regions of the country, but in some, retailers saw solid growth. Job growth rebounded somewhat in October and November, and participants expected continuing gains in employment and income to support rising consumer spending, though they anticipated slower growth of jobs, income, and spending than in recent years. However, consumer confidence recently had dropped by a sizable amount, leading some participants to voice concerns that household spending might increase less than currently anticipated. Recent data and anecdotal information indicated that the housing sector was weaker than participants had expected at the time of the Committee's previous meeting. In light of elevated inventories of unsold homes and the higher cost and reduced availability of nonconforming mortgage loans, participants agreed that the housing correction was likely to be both deeper and more prolonged than they had anticipated in October. Moreover, rising foreclosures and the resulting increase in the supply of homes for sale could put additional downward pressure on prices, leading to a greater decline in household wealth and potentially to further disruptions in the financial markets. Indicators of capital investment for the nation as a whole suggested solid but appreciably less rapid growth in business fixed investment during the fourth quarter than the third. Participants reported that firms in some regions and industries had indicated they would scale back capital spending, while contacts in other parts of the country or industries reported no such change. Similarly, business sentiment had deteriorated in many parts of the country, but in other areas firms remained cautiously optimistic. Anecdotal evidence generally suggested that inventories were not out of line with desired levels. Even so, participants expected that inventory accumulation would slow from its elevated third-quarter pace. Several participants remarked that, unlike residential real estate, commercial and industrial real estate activity remained solid in their Districts. But participants also noted the deterioration in the secondary market for commercial real estate loans and the possible effects of that development, should it persist, on building activity. The available data showed strong growth abroad and solid gains in U.S. exports. Participants noted that rising foreign demand was benefiting U.S. producers of manufactured goods and agricultural products, in particular. Exports were unlikely to continue growing at the robust rate reported for the third quarter, but participants anticipated that the combination of the weaker dollar and still-strong, though perhaps less-rapid, growth abroad would mean continued firm growth in U.S. exports. Several participants observed, however, that strong growth in foreign economies and U.S. exports might not persist if global financial conditions were to deteriorate further. Recent readings on inflation generally were seen as slightly less favorable than in earlier months, partly due to upward revisions to previously published data. Moreover, earlier increases in energy and food prices likely would imply higher headline inflation in the next few months, and past declines in the dollar would put upward pressure on import prices. Some participants said that higher input costs and rising prices of imports were leading more firms to seek price increases for goods and services. However, few business contacts had reported unusually large wage increases. Downward revisions to earlier compensation data, along with the latest readings on compensation and productivity, indicated only moderate pressure on unit labor costs. With futures prices pointing to a gradual decline in oil prices and with an anticipation of some easing of pressures on resource utilization, participants generally continued to see core PCE inflation as likely to trend down a bit over the next few years, as in their October projections, and headline inflation as likely to slow more substantially from its currently elevated level. Nonetheless, participants remained concerned about upside risks to inflation stemming from elevated prices of energy and non-energy commodities; some also cited the weaker dollar. Participants agreed that continued stable inflation expectations would be essential to achieving and sustaining a downward trend to inflation, that well-anchored expectations couldn't be taken for granted, and that policymakers would need to continue to watch inflation expectations closely. In the Committee's discussion of monetary policy for the intermeeting period, members judged that the softening in the outlook for economic growth warranted an easing of the stance of policy at this meeting. In view of the further tightening of credit and deterioration of financial market conditions, the stance of monetary policy now appeared to be somewhat restrictive. Moreover, the downside risks to the expansion, resulting particularly from the weakening of the housing sector and the deterioration in credit market conditions, had risen. In these circumstances, policy easing would help foster maximum sustainable growth and provide some additional insurance against risks. At the same time, members noted that policy had already been eased by 75 basis points and that the effects of those actions on the real economy would be evident only with a lag. And some data, including readings on the labor market, suggested that the economy retained forward momentum. Members generally saw overall inflation as likely to be lower next year, and core inflation as likely to be stable, even if policy were eased somewhat at this meeting; but they judged that some inflation pressures and risks remained, including pressures from elevated commodity and energy prices and the possibility of upward drift in the public's expectations of inflation. Weighing these considerations, nearly all members judged that a 25 basis point reduction in the Committee's target for the federal funds rate would be appropriate at this meeting. Although members agreed that the stance of policy should be eased, they also recognized that the situation was quite fluid and the economic outlook unusually uncertain. Financial stresses could increase further, intensifying the contraction in housing markets and restraining other forms of spending. Some members noted the risk of an unfavorable feedback loop in which credit market conditions restrained economic growth further, leading to additional tightening of credit; such an adverse development could require a substantial further easing of policy. Members also recognized that financial market conditions might improve more rapidly than members expected, in which case a reversal of some of the rate cuts might become appropriate. The Committee agreed that the statement to be released after this meeting should indicate that economic growth appeared to be slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending, and that strains in financial markets had increased. The characterization of the inflation situation could be largely unchanged from that of the previous meeting. Members agreed that the resurgence of financial stresses in November had increased uncertainty about the outlook. Given the heightened uncertainty, the Committee decided to refrain from providing an explicit assessment of the balance of risks. The Committee agreed on the need to remain exceptionally alert to economic and financial developments and their effects on the outlook, and members would be prepared to adjust the stance of monetary policy if prospects for economic growth or inflation were to worsen. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee in the immediate future seeks conditions in reserve markets consistent with reducing the federal funds rate to an average of around 4-1/4 percent." The vote encompassed approval of the statement below to be released at 2:15 p.m.: "The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 4-1/4 percent. Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending. Moreover, strains in financial markets have increased in recent weeks. Today's action, combined with the policy actions taken earlier, should help promote moderate growth over time. Readings on core inflation have improved modestly this year, but elevated energy and commodity prices, among other factors, may put upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully. Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth. Votes for this action: Messrs. Bernanke, Geithner, Evans, Hoenig, Kohn, Kroszner, Mishkin, Poole, and Warsh. Votes against this action: Mr. Rosengren. Mr. Rosengren dissented because he regarded the weakness in the incoming economic data and in the outlook for the economy as warranting a more aggressive policy response. In his view, the combination of a deteriorating housing sector, slowing consumer and business spending, high energy prices, and ill-functioning financial markets suggested heightened risk of continued economic weakness. In light of that possibility, a more decisive policy response was called for to minimize that risk. In any case, he felt that well-anchored inflation expectations and the Committee's ability to reverse course on policy would limit the inflation risks of a larger easing move, should the economy instead prove significantly stronger than anticipated. It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, January 29-30, 2008. The meeting adjourned at 1:15 p.m. Notation VoteBy notation vote completed on November 19, 2007, the Committee unanimously approved the minutes of the FOMC meeting held on October 30-31, 2007. Conference CallOn December 6, 2007, in a joint session of the Federal Open Market Committee and the Board of Governors, Board members and Reserve Bank presidents reviewed conditions in domestic and foreign financial markets and discussed two proposals aimed at improving market functioning. The first proposal was for the establishment of a temporary Term Auction Facility (TAF), which would provide term funding to eligible depository institutions through an auction mechanism beginning in mid-December. Meeting participants recognized that a TAF would not address all of the factors giving rise to stresses in money and credit markets, notably the ongoing concerns about credit quality and balance sheet pressures. Nonetheless, most participants viewed the TAF, which would provide liquidity to more counterparties and against a broader range of collateral than used for open market operations, as a potentially useful tool. Some mentioned that a TAF could help alleviate year-end pressures in money markets. A few participants, however, questioned the need for and the likely efficacy of the proposal, expressed concerns about the longer-run incentive effects of a TAF, and felt that the possible drawbacks could well outweigh any benefits.* Participants generally regarded the second proposal, to set up a foreign exchange swap arrangement with the European Central Bank, as a positive step in international cooperation to address elevated pressures in short-term dollar funding markets. At the conclusion of the discussion, with Mr. Poole dissenting, the Committee voted to direct the Federal Reserve Bank of New York to establish and maintain a reciprocal currency (swap) arrangement for the System Open Market Account with the European Central Bank in an amount not to exceed $20 billion. Within that aggregate limit, draws of up to $10 billion were authorized, and the arrangement itself was authorized for a period of up to 180 days, unless extended by the FOMC. Mr. Poole dissented because he viewed the swap agreement as unnecessary in light of the size of the European Central Bank's dollar-denominated foreign exchange reserves. Brian F. MadiganSecretary *Secretary's Note: The Board of Governors approved the TAF via notation vote on December 10, 2007 after the staff finalized its proposal for specifications of the TAF. Return to text Return to top

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Minute

A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, December 11, 2007, at 8:00 a.m. PRESENT:Mr. Bernanke, ChairmanMr. Geithner, Vice ChairmanMr. EvansMr. HoenigMr. KohnMr. KrosznerMr. MishkinMr. PooleMr. RosengrenMr. Warsh Ms. Cumming, Mr. Fisher, Ms. Pianalto, and Messrs. Plosser and Stern, Alternate Members of the Federal Open Market CommitteeMessrs. Lacker and Lockhart, and Ms. Yellen, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco, respectively Mr. Madigan, Secretary and Economist Ms. Danker, Deputy Secretary Ms. Smith, Assistant Secretary Mr. Skidmore, Assistant Secretary Mr. Alvarez, General Counsel Mr. Baxter, Deputy General Counsel Mr. Sheets, Economist Mr. Stockton, Economist Messrs. Clouse, Connors, Fuhrer, Kamin, Rasche, Sellon, Slifman, Sullivan, and Wilcox, Associate Economists Mr. Dudley, Manager, System Open Market Account Mr. Struckmeyer, Deputy Staff Director, Office of Staff Director for Management Mr. English, Senior Associate Director, Division of Monetary Affairs, Board of Governors Ms. Liang and Mr. Wascher, Associate Directors, Division of Research and Statistics, Board of Governors Mr. Blanchard, Assistant to the Board, Office of Board Members, Board of Governors Mr. Meyer, Visiting Reserve Bank Officer, Division of Monetary Affairs, Board of Governors Mr. Small, Project Manager, Division of Monetary Affairs, Board of Governors Mr. Luecke, Senior Financial Analyst, Division of Monetary Affairs, Board of Governors Ms. Low, Open Market Secretariat Specialist, Division of Monetary Affairs, Board of Governors Mr. Barron, First Vice President, Federal Reserve Bank of Atlanta Mr. Rosenblum, Executive Vice President, Federal Reserve Bank of Dallas Mr. Altig, Ms. Perelmuter, Messrs. Rolnick, Weinberg, and Williams, Senior Vice Presidents, Federal Reserve Banks of Atlanta, New York, Minneapolis, Richmond, and San Francisco, respectively Messrs. Bryan and Yi, Vice Presidents, Federal Reserve Banks of Cleveland and Philadelphia, respectively Mr. McCarthy, Research Officer, Federal Reserve Bank of New York The Manager of the System Open Market Account reported on recent developments in foreign exchange markets. There were no open market operations in foreign currencies for the System's account in the period since the previous meeting. The Manager also reported on developments in domestic financial markets and on System open market operations in government securities and federal agency obligations during the period since the previous meeting. By unanimous vote, the Committee ratified these transactions. The Committee approved a foreign currency swap arrangement with the Swiss National Bank that paralleled the arrangement with the European Central Bank approved during the Committee's conference call on December 6, 2007. With Mr. Poole dissenting, the Committee voted to direct the Federal Reserve Bank of New York to establish and maintain a reciprocal currency (swap) arrangement for the System Open Market Account with the Swiss National Bank in an amount not to exceed $4 billion. The Committee authorized associated draws of up to the full amount of $4 billion, and the arrangement itself was authorized for a period of up to 180 days unless extended by the FOMC. Mr. Poole dissented because he viewed the swap agreement as unnecessary in light of the size of the Swiss National Bank's dollar-denominated foreign exchange reserves. The information reviewed at the December meeting indicated that, after the robust gains of the summer, economic activity decelerated significantly in the fourth quarter. Consumption growth slowed, and survey measures of sentiment dropped further. Many readings from the business sector were also softer:  Industrial production fell in October, as did orders and shipments of capital goods. Employment gains stepped down during the four months ending in November from their pace earlier in the year. Headline consumer price inflation moved higher in September and October as energy prices increased significantly; core inflation also rose but remained moderate. The slowing in private employment gains was due in large part to the ongoing weakness in the housing market. Employment in residential construction posted its fourth month of sizable declines in November, and employment in housing-related sectors such as finance, real estate, and building-material and garden-supply retailers continued to trend down. Elsewhere, factory jobs declined again, while employment in most service-producing industries continued to move up. Aggregate hours of production or nonsupervisory workers edged up in October and November. Some indicators from the household survey also suggested softening in the labor market, but the unemployment rate held steady at 4.7 percent through November. Industrial production fell in October after small increases in the previous two months. The index for motor vehicles and parts fell for the third consecutive month, and the index for construction supplies moved down for the fourth straight month. Materials output also declined in October, with production likely curbed by weak demand from the construction and motor vehicle sectors. Production in high-tech industries, however, increased modestly, and commercial aircraft production registered another solid gain. In November, output appeared to have edged up in manufacturing sectors (with the exception of the motor vehicles sector) for which weekly physical product data were available. After posting notable gains in the summer, real consumer spending was nearly flat in September and October. Spending on goods excluding motor vehicles was little changed on net over that period. Spending on services edged down, reflecting an extraordinarily large drop in securities commissions in September. The most recent readings on weekly chain store sales as well as industry reports and surveys suggested subdued gains in November and an uneven start to the holiday shopping season. Sales of light motor vehicles in November remained close to the pace that had prevailed since the second quarter. Real disposable income was about unchanged in September and October. The Reuters/University of Michigan index of consumer sentiment ticked down further in early December as respondents took a more pessimistic view of the outlook for their personal finances and for business conditions in the year ahead. In the housing market, new home sales were below their third-quarter pace, and sales of existing homes were flat in October following sharp declines in August and September. These declines likely were exacerbated by the deterioration in nonprime mortgage markets and by the higher interest rates and tighter lending conditions for jumbo loans. Single-family housing starts stepped down again in October after substantial declines in the June-September period. Yet, because of sagging sales, builders made only limited progress in paring down their substantial inventories. Single-family permit issuance continued along the steep downward trajectory that had begun two years earlier, which pointed toward further slowing in homebuilding over the near term. Multifamily starts rebounded in October from an unusually low reading in September, and the level of multifamily starts was near the midpoint of the range in which this series had fluctuated over the past ten years. Real spending on equipment and software posted a solid increase in the third quarter. In October, however, orders and shipments of nondefense capital goods excluding aircraft declined, suggesting that some deceleration in spending was under way in the fourth quarter. The October decline in orders and shipments was led by weakness in the high-tech sector:  Shipments of computers and peripheral equipment declined while the industrial production index for computers was flat; orders and shipments for communications equipment plunged. Some of that weakness may have been attributable to temporary production disruptions stemming from the wildfires in Southern California; cutbacks in demand from large financial institutions affected by market turmoil may have contributed as well. In the transportation equipment category, purchases of medium and heavy trucks changed little, and orders data suggested that sales would remain near their current levels in the coming months. Orders for equipment outside high-tech and transportation rose in October, but shipments were about flat, pointing to a weaker fourth quarter for business spending after two quarters of brisk increases. Some prominent surveys of business conditions remained consistent with modest gains in spending on equipment and software during the fourth quarter, but other surveys were less sanguine. In addition, although the cost of capital was little changed for borrowers in the investment-grade corporate bond market, costs for borrowers in the high-yield corporate bond market were up significantly. In the third quarter, corporate cash flows appeared to have dropped off, leaving firms with diminished internally generated funds for financing investment. Data available through October suggested that nonresidential building activity remained vigorous. Real nonfarm inventory investment excluding motor vehicles increased slightly faster in the third quarter than in the second quarter. Outside of motor vehicles, the ratio of book-value inventories to sales had ticked up slightly in September but remained near the low end of its range in recent years. Book-value estimates of the inventory investment of manufacturers--the only inventory data available beyond the third quarter--were up in October at about the third-quarter pace. The U.S. international trade deficit narrowed slightly in September as an increase in exports more than offset higher imports. The September gain in exports primarily reflected higher exports of goods; services exports recorded moderate growth. Exports of agricultural products exhibited particularly robust growth, with both higher prices and greater volumes. Exports of industrial supplies and consumer goods also moved up smartly in September. Automotive products exports, in contrast, were flat, and capital goods exports fell, led by a decline in aircraft. The increase in imports primarily reflected higher imports of capital goods, with imports of computers showing particularly strong growth. Imports of automotive products, consumer goods, and services also increased. Imports of petroleum, however, were flat, and imports of industrial supplies fell. Output growth in the advanced foreign economies picked up in the third quarter. In Japan, real output rebounded, led by exports. In the euro area, GDP growth returned to a solid pace in the third quarter on the back of a strong recovery in investment. In Canada and the United Kingdom, output growth moderated but remained robust, as vigorous domestic demand was partly offset by rapid growth of imports. Indicators of fourth-quarter activity in the advanced foreign economies were less robust on net. Confidence indicators had deteriorated in most major economies in the wake of the financial turmoil and remained relatively weak. In November, the euro-area and U.K. purchasing managers indexes for services were well below their level over the first half of the year; nevertheless they pointed to moderate expansion. Labor market conditions generally remained relatively strong in recent months. Incoming data on emerging-market economies were positive on balance. Overall, growth in emerging Asia moderated somewhat in the third quarter from its double-digit pace in the second quarter, but remained strong. Economic growth was also solid in Latin America, largely reflecting stronger-than-expected activity in Mexico. In the United States, headline consumer price inflation increased in September and October from its low rates in the summer as the surge in crude oil prices began to be reflected in retail energy prices. In addition, though the rise in food prices in October was slower than in August and September, it remained above that of core consumer prices. Excluding food and energy, inflation was moderate, although it was up from its low rates in the spring. The pickup in core consumer inflation over this period reflected an acceleration in some prices that were unusually soft last spring, such as those for apparel, prescription drugs, and medical services, as well as nonmarket prices. On a twelve-month-change basis, core consumer price inflation was down noticeably from a year earlier. In October, the producer price index for core intermediate materials moved up only slightly for a second month, and the twelve-month increase in these prices was considerably below that of the year-earlier period. This pattern reflected, in part, a deceleration in the prices of a wide variety of construction materials, such as cement and gypsum, and in the prices of some metal products. In response to rising energy prices, household survey measures of expectations for year-ahead inflation picked up in November and then edged higher in December. Households' longer-term inflation expectations also edged up in both November and December. Average hourly earnings increased faster in November than in the previous two months. Over the twelve months that ended in November, however, this wage measure rose a bit more slowly than over the previous twelve months. At its October meeting, the FOMC lowered its target for the federal funds rate 25 basis points, to 4-1/2 percent. The Board of Governors also approved a 25 basis point decrease in the discount rate, to 5 percent, leaving the gap between the federal funds rate target and the discount rate at 50 basis points. The Committee's statement noted that, while economic growth was solid in the third quarter and strains in financial markets had eased somewhat on balance, the pace of economic expansion would likely slow in the near term, partly reflecting the intensification of the housing correction. The Committee indicated that its action, combined with the policy action taken in September, should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and should promote moderate growth over time. Readings on core inflation had improved modestly during the year, but the statement noted that recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation. In this context, the Committee judged that some inflation risks remained and indicated that it would continue to monitor inflation developments carefully. The Committee also judged that, after this action, the upside risks to inflation roughly balanced the downside risks to growth. The Committee said that it would continue to assess the effects of financial and other developments on economic prospects and would act as needed to foster price stability and sustainable economic growth. The Committee's action at its October meeting was largely expected by market participants, although the assessment that the upside risks to inflation balanced the downside risks to growth was not fully anticipated and apparently led investors to revise up slightly the expected path for policy. During the intermeeting period, the release of the FOMC minutes and associated summary of economic projections, as well as various data releases, elicited only modest market reaction. In contrast, markets were buffeted by concerns about the potential adverse effects on credit availability and economic growth of sizable losses at large financial institutions and of financial market strains in general. Market participants marked down their expected path for policy substantially, and by the time of the December meeting, investors were virtually certain of a rate cut. Two-year Treasury yields fell on net over the intermeeting period by an amount about in line with revisions to policy expectations. Ten-year Treasury yields also declined, but less than shorter-term yields. The steepening of the yield curve was due mostly to sharply lower short- and intermediate-term forward rates, consistent with investors' apparently more pessimistic outlook for economic growth. TIPS yields fell less than their nominal counterparts, implying modest declines in inflation compensation both at the five-year and longer horizons. After showing some signs of improvement in late September and October, conditions in financial markets worsened over the intermeeting period. Heightened worries about counterparty credit risk, balance sheet constraints, and liquidity pressures affected interbank funding markets and commercial paper markets, where spreads over risk-free rates rose to levels that were, in some cases, higher than those seen in August. Strains in those markets were exacerbated by concerns related to year-end pressures. In longer-term corporate markets, both investment- and speculative-grade credit spreads widened considerably; issuance slowed but remained strong. In housing finance, subprime mortgage markets stayed virtually shut, and spreads on jumbo loans apparently widened further. Spreads on conforming mortgage products also widened after reports of losses and reduced capital ratios at the housing-related government-sponsored enterprises. Broad-based equity indexes were volatile and ended the period down noticeably. Financial stocks were especially hard hit, dropping substantially more than the broad indexes. Similar stresses were evident in the financial markets of major foreign economies. The trade-weighted foreign exchange value of the dollar against major currencies moved up, on balance, over the intermeeting period. Debt in the domestic nonfinancial sector was estimated to be increasing somewhat more slowly in the fourth quarter than in the third quarter. Nonfinancial business debt continued to expand strongly, supported by solid bond issuance and by a small rebound in the issuance of commercial paper. Bank loans outstanding also continued to rise rapidly. Household mortgage debt was expected to expand at a reduced rate in the fourth quarter, reflecting softer home prices and declining home sales, as well as a tightening in credit conditions for some borrowers. Nonmortgage consumer credit in the fourth quarter appeared to be expanding at a moderate pace. In November, M2 growth picked up slightly from its October rate. While liquid deposits continued to grow slowly, heightened demand for safety and liquidity appeared to boost holdings of retail money market mutual funds. Small time deposits continued to expand, likely in part due to high rates offered by some depository institutions to attract retail deposits. Currency outstanding was about flat in November. In the forecast prepared for this meeting, the staff revised down its estimate of growth in aggregate economic activity in the fourth quarter. Although third-quarter real GDP was revised up sharply, most available indicators of activity in the fourth quarter were more downbeat than had previously been expected. Faster inventory investment contributed importantly to the upward revision to third-quarter real GDP, but part of that upswing was expected to be unwound in the fourth quarter. The available data for domestic final sales also suggested a weaker fourth quarter than had been anticipated. In particular, real personal consumption expenditures had been about unchanged in September and October, and the contraction in single-family construction had intensified. Providing a bit of an offset to these factors, however, was further improvement in the external sector. The staff also marked down its projection for the rise in real GDP over the remainder of the forecast period. Real GDP was anticipated to increase at a rate noticeably below its potential in 2008. Conditions in financial markets had deteriorated over the intermeeting period and were expected to impose more restraint on residential construction as well as consumer and business spending in 2008 than previously expected. In addition, compared with the previous forecast, higher oil prices and lower real income were expected to weigh on the pace of real activity throughout 2008 and 2009. By 2009, however, the staff projected that the drag from those factors would lessen and that an improvement in mortgage credit availability would lead to a gradual recovery in the housing market. Accordingly, economic activity was expected to increase at its potential rate in 2009. The external sector was projected to continue to support domestic economic activity throughout the forecast period. Reflecting upward revisions to previously published data, the forecast for core PCE price inflation for 2007 was a bit higher than in the preceding forecast; core inflation was projected to hold steady during 2008 as the indirect effects of higher energy prices on prices of core consumer goods and services were offset by the slight easing of resource pressures and the expected deceleration in the prices of nonfuel imported goods. The forecast for headline PCE inflation anticipated that retail energy prices would rise sharply in the first quarter of 2008 and that food price inflation would outpace core price inflation in the beginning of the year. As pressures from these sources lessened over the remainder of 2008 and in 2009, both core and headline price inflation were projected to edge down, and headline inflation was expected to moderate to a pace slightly below core inflation. In their discussion of the economic situation and outlook, participants generally noted that incoming information pointed to a somewhat weaker outlook for spending than at the time of the October meeting. The decline in housing had steepened, and consumer outlays appeared to be softening more than anticipated, perhaps indicating some spillover from the housing correction to other components of spending. These developments, together with renewed strains in financial markets, suggested that growth in late 2007 and during 2008 was likely to be somewhat more sluggish than participants had indicated in their October projections. Still, looking further ahead, participants continued to expect that, aided by an easing in the stance of monetary policy, economic growth would gradually recover as weakness in the housing sector abated and financial conditions improved, allowing the economy to expand at about its trend rate in 2009. Participants thought that recent increases in energy prices likely would boost headline inflation temporarily, but with futures prices pointing to a gradual decline in oil prices and with pressures on resource utilization seen as likely to ease a bit, most participants continued to anticipate some moderation in core and especially headline inflation over the next few years. Participants discussed in detail the resurgence of stresses in financial markets in November. The renewed stresses reflected evidence that the performance of mortgage-related assets was deteriorating further, potentially increasing the losses that were being borne in part by a number of major financial firms, including money-center banks, housing-related government-sponsored enterprises, investment banks, and financial guarantors. Moreover, participants recognized that some lenders might be exposed to additional losses:  Delinquency rates on credit card loans, auto loans, and other forms of consumer credit, while still moderate, had increased somewhat, particularly in areas hard hit by house price declines and mortgage defaults. Past and prospective losses appeared to be spurring lenders to tighten further the terms on new extensions of credit, not just in the troubled markets for nonconforming mortgages but, in some cases, for other forms of credit as well. In addition, participants noted that some intermediaries were facing balance sheet pressures and could become constrained by concerns about rating-agency or regulatory capital requirements. Among other factors, banks were experiencing unanticipated growth in loans as a result of continuing illiquidity in the market for leveraged loans, persisting problems in the commercial paper market that had sparked draws on back-up lines of credit, and more recently, consolidation of assets of off-balance-sheet affiliates onto banks' balance sheets. Concerns about credit risk and the pressures on banks' balance sheet capacity appeared to be contributing to diminished liquidity in interbank markets and to a pronounced widening in term spreads for periods extending through year-end. A number of participants noted some potential for the Federal Reserve's new Term Auction Facility and accompanying actions by other central banks to ameliorate pressures in term funding markets. Participants recognized, however, that uncertainties about values of mortgage-related assets and related losses, and consequently strains in financial markets, could persist for quite some time. Some participants cited more-positive aspects of recent financial developments. A number of large financial intermediaries had been able to raise substantial amounts of new capital. Moreover, credit losses and asset write-downs at regional and community banks had generally been modest; these institutions typically were not facing balance sheet pressures and reportedly had not tightened lending standards appreciably, except for those on real estate loans. And, although spreads on corporate bonds had widened over the intermeeting period, especially for speculative-grade issues, the cost of credit to most nonfinancial firms remained relatively low; nonfinancial firms outside of the real estate and construction sectors generally reported that credit conditions, while somewhat tighter, were not restricting planned investment spending; and consumer credit remained readily available for most households. Nonetheless, participants agreed that heightened financial stress posed increased downside risks to growth and made the outlook for the economy considerably more uncertain. Participants noted the marked deceleration in consumer spending in the national data. Real personal consumption expenditures had shown essentially no growth in September and October, suggesting that tighter credit conditions, higher gasoline prices, and the continuing housing correction might be restraining growth in real consumer spending. Retailers reported weaker results in many regions of the country, but in some, retailers saw solid growth. Job growth rebounded somewhat in October and November, and participants expected continuing gains in employment and income to support rising consumer spending, though they anticipated slower growth of jobs, income, and spending than in recent years. However, consumer confidence recently had dropped by a sizable amount, leading some participants to voice concerns that household spending might increase less than currently anticipated. Recent data and anecdotal information indicated that the housing sector was weaker than participants had expected at the time of the Committee's previous meeting. In light of elevated inventories of unsold homes and the higher cost and reduced availability of nonconforming mortgage loans, participants agreed that the housing correction was likely to be both deeper and more prolonged than they had anticipated in October. Moreover, rising foreclosures and the resulting increase in the supply of homes for sale could put additional downward pressure on prices, leading to a greater decline in household wealth and potentially to further disruptions in the financial markets. Indicators of capital investment for the nation as a whole suggested solid but appreciably less rapid growth in business fixed investment during the fourth quarter than the third. Participants reported that firms in some regions and industries had indicated they would scale back capital spending, while contacts in other parts of the country or industries reported no such change. Similarly, business sentiment had deteriorated in many parts of the country, but in other areas firms remained cautiously optimistic. Anecdotal evidence generally suggested that inventories were not out of line with desired levels. Even so, participants expected that inventory accumulation would slow from its elevated third-quarter pace. Several participants remarked that, unlike residential real estate, commercial and industrial real estate activity remained solid in their Districts. But participants also noted the deterioration in the secondary market for commercial real estate loans and the possible effects of that development, should it persist, on building activity. The available data showed strong growth abroad and solid gains in U.S. exports. Participants noted that rising foreign demand was benefiting U.S. producers of manufactured goods and agricultural products, in particular. Exports were unlikely to continue growing at the robust rate reported for the third quarter, but participants anticipated that the combination of the weaker dollar and still-strong, though perhaps less-rapid, growth abroad would mean continued firm growth in U.S. exports. Several participants observed, however, that strong growth in foreign economies and U.S. exports might not persist if global financial conditions were to deteriorate further. Recent readings on inflation generally were seen as slightly less favorable than in earlier months, partly due to upward revisions to previously published data. Moreover, earlier increases in energy and food prices likely would imply higher headline inflation in the next few months, and past declines in the dollar would put upward pressure on import prices. Some participants said that higher input costs and rising prices of imports were leading more firms to seek price increases for goods and services. However, few business contacts had reported unusually large wage increases. Downward revisions to earlier compensation data, along with the latest readings on compensation and productivity, indicated only moderate pressure on unit labor costs. With futures prices pointing to a gradual decline in oil prices and with an anticipation of some easing of pressures on resource utilization, participants generally continued to see core PCE inflation as likely to trend down a bit over the next few years, as in their October projections, and headline inflation as likely to slow more substantially from its currently elevated level. Nonetheless, participants remained concerned about upside risks to inflation stemming from elevated prices of energy and non-energy commodities; some also cited the weaker dollar. Participants agreed that continued stable inflation expectations would be essential to achieving and sustaining a downward trend to inflation, that well-anchored expectations couldn't be taken for granted, and that policymakers would need to continue to watch inflation expectations closely. In the Committee's discussion of monetary policy for the intermeeting period, members judged that the softening in the outlook for economic growth warranted an easing of the stance of policy at this meeting. In view of the further tightening of credit and deterioration of financial market conditions, the stance of monetary policy now appeared to be somewhat restrictive. Moreover, the downside risks to the expansion, resulting particularly from the weakening of the housing sector and the deterioration in credit market conditions, had risen. In these circumstances, policy easing would help foster maximum sustainable growth and provide some additional insurance against risks. At the same time, members noted that policy had already been eased by 75 basis points and that the effects of those actions on the real economy would be evident only with a lag. And some data, including readings on the labor market, suggested that the economy retained forward momentum. Members generally saw overall inflation as likely to be lower next year, and core inflation as likely to be stable, even if policy were eased somewhat at this meeting; but they judged that some inflation pressures and risks remained, including pressures from elevated commodity and energy prices and the possibility of upward drift in the public's expectations of inflation. Weighing these considerations, nearly all members judged that a 25 basis point reduction in the Committee's target for the federal funds rate would be appropriate at this meeting. Although members agreed that the stance of policy should be eased, they also recognized that the situation was quite fluid and the economic outlook unusually uncertain. Financial stresses could increase further, intensifying the contraction in housing markets and restraining other forms of spending. Some members noted the risk of an unfavorable feedback loop in which credit market conditions restrained economic growth further, leading to additional tightening of credit; such an adverse development could require a substantial further easing of policy. Members also recognized that financial market conditions might improve more rapidly than members expected, in which case a reversal of some of the rate cuts might become appropriate. The Committee agreed that the statement to be released after this meeting should indicate that economic growth appeared to be slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending, and that strains in financial markets had increased. The characterization of the inflation situation could be largely unchanged from that of the previous meeting. Members agreed that the resurgence of financial stresses in November had increased uncertainty about the outlook. Given the heightened uncertainty, the Committee decided to refrain from providing an explicit assessment of the balance of risks. The Committee agreed on the need to remain exceptionally alert to economic and financial developments and their effects on the outlook, and members would be prepared to adjust the stance of monetary policy if prospects for economic growth or inflation were to worsen. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee in the immediate future seeks conditions in reserve markets consistent with reducing the federal funds rate to an average of around 4-1/4 percent." The vote encompassed approval of the statement below to be released at 2:15 p.m.: "The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 4-1/4 percent. Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending. Moreover, strains in financial markets have increased in recent weeks. Today's action, combined with the policy actions taken earlier, should help promote moderate growth over time. Readings on core inflation have improved modestly this year, but elevated energy and commodity prices, among other factors, may put upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully. Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth. Votes for this action: Messrs. Bernanke, Geithner, Evans, Hoenig, Kohn, Kroszner, Mishkin, Poole, and Warsh. Votes against this action: Mr. Rosengren. Mr. Rosengren dissented because he regarded the weakness in the incoming economic data and in the outlook for the economy as warranting a more aggressive policy response. In his view, the combination of a deteriorating housing sector, slowing consumer and business spending, high energy prices, and ill-functioning financial markets suggested heightened risk of continued economic weakness. In light of that possibility, a more decisive policy response was called for to minimize that risk. In any case, he felt that well-anchored inflation expectations and the Committee's ability to reverse course on policy would limit the inflation risks of a larger easing move, should the economy instead prove significantly stronger than anticipated. It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, January 29-30, 2008. The meeting adjourned at 1:15 p.m. Notation VoteBy notation vote completed on November 19, 2007, the Committee unanimously approved the minutes of the FOMC meeting held on October 30-31, 2007. Conference CallOn December 6, 2007, in a joint session of the Federal Open Market Committee and the Board of Governors, Board members and Reserve Bank presidents reviewed conditions in domestic and foreign financial markets and discussed two proposals aimed at improving market functioning. The first proposal was for the establishment of a temporary Term Auction Facility (TAF), which would provide term funding to eligible depository institutions through an auction mechanism beginning in mid-December. Meeting participants recognized that a TAF would not address all of the factors giving rise to stresses in money and credit markets, notably the ongoing concerns about credit quality and balance sheet pressures. Nonetheless, most participants viewed the TAF, which would provide liquidity to more counterparties and against a broader range of collateral than used for open market operations, as a potentially useful tool. Some mentioned that a TAF could help alleviate year-end pressures in money markets. A few participants, however, questioned the need for and the likely efficacy of the proposal, expressed concerns about the longer-run incentive effects of a TAF, and felt that the possible drawbacks could well outweigh any benefits.* Participants generally regarded the second proposal, to set up a foreign exchange swap arrangement with the European Central Bank, as a positive step in international cooperation to address elevated pressures in short-term dollar funding markets. At the conclusion of the discussion, with Mr. Poole dissenting, the Committee voted to direct the Federal Reserve Bank of New York to establish and maintain a reciprocal currency (swap) arrangement for the System Open Market Account with the European Central Bank in an amount not to exceed $20 billion. Within that aggregate limit, draws of up to $10 billion were authorized, and the arrangement itself was authorized for a period of up to 180 days, unless extended by the FOMC. Mr. Poole dissented because he viewed the swap agreement as unnecessary in light of the size of the European Central Bank's dollar-denominated foreign exchange reserves. Brian F. MadiganSecretary *Secretary's Note: The Board of Governors approved the TAF via notation vote on December 10, 2007 after the staff finalized its proposal for specifications of the TAF. Return to text Return to top

2007-11-20

Minute

A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, October 30, 2007 at 2:00 p.m. and continued on Wednesday, October 31, 2007 at 9:00 a.m. Present:Mr. Bernanke, ChairmanMr. Geithner, Vice ChairmanMr. EvansMr. HoenigMr. KohnMr. KrosznerMr. MishkinMr. PooleMr. RosengrenMr. Warsh Ms. Cumming, Mr. Fisher, Ms. Pianalto, and Messrs. Plosser and Stern, Alternate Members of the Federal Open Market Committee Messrs. Lacker and Lockhart, and Ms. Yellen, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco, respectively Mr. Madigan, Secretary and EconomistMs. Danker, Deputy SecretaryMs. Smith, Assistant SecretaryMr. Skidmore, Assistant SecretaryMr. Alvarez, General CounselMr. Baxter, Deputy General CounselMr. Sheets, Economist Mr. Stockton, Economist Messrs. Clouse, Connors, Fuhrer, Kamin, Rasche, Slifman, Sullivan, and Wilcox, Associate Economists Mr. Dudley, Manager, System Open Market Account Mr. Struckmeyer, Deputy Staff Director, Office of Staff Director for Management Mr. English, Senior Associate Director, Division of Monetary Affairs, Board of Governors Messrs. Reifschneider 1 and Wascher, Associate Directors, Division of Research and Statistics, Board of Governors Mr. Wright, Deputy Associate Director, Division of Monetary Affairs, Board of Governors Mr. Zakrajšek, Assistant Director, Division of Monetary Affairs, Board of Governors Mr. Blanchard, Assistant to the Board, Office of Board Members, Board of Governors Ms. K. Johnson, Senior Adviser, Division of International Finance, Board of Governors Mr. Oliner, Senior Adviser, Division of Research and Statistics, Board of Governors Mr. Dale, 1 Senior Adviser, Division of Monetary Affairs, Board of Governors Mr. Gross,1 Special Assistant to the Board, Office of Board Members, Board of Governors Mr. Small, Project Manager, Division of Monetary Affairs, Board of Governors Messrs. Kumasaka 2 and Luecke,3 Senior Financial Analysts, Division of Monetary Affairs, Board of Governors Ms. Judson, Economist, Division of Monetary Affairs, Board of Governors Ms. Low, Open Market Secretariat Specialist, Division of Monetary Affairs, Board of Governors Mr. Lyon, First Vice President, Federal Reserve Bank of Minneapolis Messrs. Judd and Sniderman, Executive Vice Presidents, Federal Reserve Banks of San Francisco and Cleveland, respectively Mr. Altig and Ms. Mester, Senior Vice Presidents, Federal Reserve Banks of Atlanta and Philadelphia, respectively Mr. Hakkio, Special Adviser, Federal Reserve Bank of Kansas City Messrs. Hilton, Koenig, and Potter, Vice Presidents, Federal Reserve Banks of New York, Dallas, and New York, respectively Mr. Weber, Senior Research Officer, Federal Reserve Bank of Minneapolis Mr. Hetzel, Senior Economist, Federal Reserve Bank of Richmond 1. Attended portion of meeting relating to the discussion of communication issues. Return to text2. Attended Tuesday session. Return to text3. Attended Wednesday session. Return to text By unanimous vote, the Federal Open Market Committee selected D. Nathan Sheets to serve as Economist until the selection of his successor at the first regularly scheduled meeting of the Committee in 2008. The Manager of the System Open Market Account reported on recent developments in foreign exchange markets. There were no open market operations in foreign currencies for the System’s account in the period since the previous meeting. The Manager also reported on developments in domestic financial markets and on System open market operations in government securities and federal agency obligations during the period since the previous meeting. By unanimous vote, the Committee ratified these transactions. The information provided to the Committee on the first day of the meeting, prior to the release of the advance estimates of the third-quarter national income and product accounts, indicated that economic activity expanded at a solid pace in the third quarter. Consumer spending rose more strongly after a tepid increase in the second quarter, and the pace of expansion of business outlays for equipment and structures remained reasonably solid. Manufacturing posted a sizable gain for the third quarter as a whole. In contrast, the slump in residential investment intensified during the third quarter, at least partly because of ongoing disruptions in the markets for nonconforming mortgages. The average monthly gain in private employment also slowed significantly. Headline inflation eased during the third quarter, reflecting a decline in energy prices; core inflation continued to be moderate. Employment increased more slowly in the third quarter than in the first half of the year. Private payroll employment registered a considerably smaller average monthly gain; employment in residential construction, manufacturing, and industries related to mortgage lending continued to decline, but most service-producing industries added jobs at a moderate pace. With gains in employment smaller and the workweek flat, the growth of aggregate hours of private production or nonsupervisory workers stepped down from its second-quarter pace. The labor force participation rate was unchanged, on average, in the third quarter, and the unemployment rate ticked up to 4.7 percent in September. Industrial production changed little in August and September after having posted solid advances in June and July. Manufacturing output expanded in the third quarter overall at about the same pace as in the second quarter but declined modestly on net in August and September. During those two months, production was damped by declines in the output of motor vehicles and parts. In addition, output of construction supplies and products fell, likely reflecting the ongoing decline in residential investment. Meanwhile, production in the high-tech sector rose at a moderate rate. Consumer spending was well maintained in August and September. Motor vehicle sales improved, and real spending on other goods posted solid gains in both months. Real outlays on consumer services were strong in August because of a weather-induced jump in energy services. Solid increases in nominal wages and salaries and lower headline inflation led to robust gains in real income over the summer. However, other factors affecting consumer spending were mixed. Short-term interest rates dropped and stock prices rose, on balance, after August. By contrast, house prices continued to decelerate, standards on consumer and mortgage credit tightened after mid-summer, and the turmoil in financial markets that started in the summer likely exerted some restraint on consumer spending. Moreover, measures of consumer confidence had declined in recent months. The housing downturn deepened as sales of new and existing single-family homes continued to fall. Deterioration in nonprime mortgage markets as well as higher mortgage interest rates and tighter lending conditions for prime jumbo loans since earlier in the year appeared to be restraining housing demand. Forward-looking indicators, including an index of pending home sales and adjusted single-family permit issuance, continued to point to a further slowing in housing activity over the near term. Single-family housing starts declined significantly over August and September. Nonetheless, with single-family home sales continuing to sag, inventories of unsold homes remained quite elevated. In the multifamily sector, starts declined sharply in September; however, the third-quarter reading remained within the fairly narrow range observed over the past decade. Orders and shipments of nondefense capital goods excluding aircraft rose on average over August and September. In the high-tech category, orders and shipments of computers and peripherals posted robust gains over the same period. Shipments of communication equipment also rose in August and September, but orders were little changed on balance over the same period. Outside the technology sector, shipments of nondefense capital goods excluding aircraft increased at a solid rate over August and September but orders declined in August and were flat in September. Sales of medium and heavy trucks leveled off in the third quarter after a sharp drop in the first half of the year. Domestic outlays for aircraft likely stepped down somewhat in the third quarter. Nonresidential building activity remained vigorous through August after having posted very strong gains in the second quarter; anecdotal evidence through early October indicated that the recent turbulence in commercial credit markets had done little to slow the pace of commercial construction. More generally, surveys of business conditions continued to point to further near-term gains in spending, although reports from business contacts indicated that some firms had marked down their capital spending plans. Data on the book value of business inventories through August suggested that real nonfarm inventory investment excluding motor vehicles moved down in the third quarter after having risen at a moderate pace in the second quarter. The ratio of book-value inventories to sales in the manufacturing and trade sector excluding motor vehicles, which was available through August, remained well below the elevated values seen around the turn of the year. Purchasing managers, on average, viewed the level of their customers’ inventories as about right in September. The U.S. international trade deficit narrowed in August as exports increased and imports decreased. Goods exports were boosted by a jump in exports of agricultural products and of gold, which more than offset a decline in exports of other goods. Exports of automotive products fell back sharply after a surge in July. Exports of capital goods contracted slightly, led by a drop in aircraft exports. Exports of semiconductors declined, while exports of computers were about flat. On the import side, the decline was concentrated in goods; service imports were flat. Higher imports of oil and of capital goods, particularly computers and semiconductors, were more than offset by lower imports of automotive products, consumer goods, and industrial supplies excluding oil. Indicators of economic activity in the third quarter for advanced foreign economies were solid on balance. In the euro area, production and sales picked up in the third quarter from their second-quarter levels. However, recent survey data, including the purchasing managers’ index for the service sector in the euro area, pointed to a possible slowing in the pace of growth. Likewise, notwithstanding a strong preliminary estimate of third-quarter GDP growth in the United Kingdom, more recent surveys pointed to some softening. Recent Canadian data were mixed, with relatively strong employment growth and some weakness in retail sales. In contrast, Japan’s retail sales and exports rebounded in August, and the October Tankan survey seemed to suggest that the second quarter’s sharp contraction in investment was temporary. In emerging-market economies, recent information, mostly through August, gave no signs that the turmoil in financial markets was having a significant negative effect on real economic activity. In emerging Asia, activity appeared to have remained robust, although growth slowed from its elevated second-quarter pace. Economic indicators for Mexico pointed to moderate growth in the third quarter. In South America, activity was strong, boosted by high prices for commodities and, in Argentina and Venezuela, by expansionary macroeconomic policies. Food prices continued to be a major source of inflationary pressures in emerging-market economies, and Chinese authorities took several steps aimed at quelling rising prices. After having risen rapidly in the first half of the year, headline consumer prices decelerated considerably over the summer, largely because of a fall in energy prices. Over September and October, gasoline prices appeared to have risen only moderately despite a jump in crude oil costs. Consumer food prices posted further sizable increases in August and September and continued to run well above the change in core prices. Core consumer price inflation remained moderate in August and September and, on a twelve-month change basis, was down noticeably from a year earlier. Core goods prices fell over the year ending in September after having risen little over the preceding year; noticeable decelerations occurred in the prices of apparel, prescription drugs, and motor vehicles. In addition, increases in owners’ equivalent rent slowed noticeably, while rent inflation remained about the same as a year earlier. The producer price index for core intermediate materials edged up in September. The twelve-month change in that index stepped down considerably from last year, in part because of softer prices for a variety of energy-intensive and construction-related items. Household surveys indicated that median year-ahead inflation expectations inched down in September and October to about the level observed in the first quarter, and longer-term inflation expectations slipped to their lowest level in two years. Average hourly earnings posted a moderate increase over the twelve months ending in September. At its September meeting, the FOMC lowered its target for the federal funds rate 50 basis points, to 4-3/4 percent. The Board of Governors also approved a 50 basis point decrease in the discount rate, to 5-1/4 percent, leaving the gap between the federal funds rate target and the discount rate at 50 basis points. The Committee’s statement noted that, while economic growth had been moderate during the first half of the year, the tightening of credit conditions had the potential to intensify the housing correction and to restrain economic growth more generally. The Committee indicated that its action was intended to help forestall some of the adverse effects on the broader economy that could otherwise arise from the disruptions in financial markets and to promote moderate growth over time. Readings on core inflation had improved modestly during the year, but the Committee judged that some inflation risks remained, and the Committee planned to continue to monitor inflation developments carefully. The Committee further noted that developments in financial markets since the last regular FOMC meeting had increased the uncertainty surrounding the economic outlook. Accordingly, the Committee would continue to assess the effects of these and other developments on economic prospects and remained ready to act as needed to foster price stability and sustainable economic growth. The expected path for monetary policy as inferred from futures markets declined in the wake of the September policy action, as many investors were surprised by the magnitude of the reduction in the target rate. Over the intermeeting period, many investors came to expect that the Committee would reduce the target federal funds rate at its October meeting; in addition, the anticipated policy path further ahead moved down a bit more, on net, over the remainder of the intermeeting period, apparently in response to heightened concerns among investors about economic growth. Early in the intermeeting period, the functioning of short-term funding markets improved somewhat, but conditions in these markets remained strained. The effective federal funds rate was very close to the target, on average, but the average absolute daily deviation of the effective rate from the target and the intraday standard deviation remained elevated. Credit spreads declined in the commercial paper and term interbank funding markets but stayed well above longer-term norms. Liquidity in the Treasury bill market was poor at times. Corporate bond spreads narrowed somewhat, leaving private yields a little lower. Nonfinancial bond issuance was robust; speculative-grade offerings increased markedly. The credit quality of most households remained strong, but delinquency rates on subprime mortgages climbed further. Securitization of nonconforming mortgages remained limited, and spreads on jumbo mortgages relative to conforming mortgages stayed high. Two-year Treasury yields declined roughly in line with the lower expected policy path, while yields on ten-year Treasuries were little changed, on net. TIPS-based inflation compensation was about unchanged on balance over the intermeeting period despite a sharp rise in spot oil prices. Stock prices jumped early in the intermeeting period in response to the cut in the target federal funds rate and some favorable economic news but later dropped back, leaving broad indexes up only a bit on net. The foreign exchange value of the dollar against other major currencies declined notably. Debt of the domestic nonfinancial sectors was estimated to have expanded slightly more quickly in the third quarter than in the previous quarter. Despite evidence that bank lending standards and terms had tightened over the previous three months, business debt was still rising strongly, reflecting a continued surge in commercial and industrial (C&I) lending by banks and robust issuance of investment-grade bonds. The expansion of business loans was apparently due in part to financings for leveraged buyouts that underwriters could not syndicate to institutional investors. Household mortgage borrowing was estimated to have decelerated again in the third quarter. M2 increased significantly more slowly in September and October than the rapid pace observed in August, when the financial market turmoil apparently drove investors to the safety of M2 assets. Inflows to retail money market funds and small time deposits were especially strong in September and October; small time deposits were apparently boosted by the attractive rates that banks were offering in order to help fund their expanding loan portfolios. In the forecast prepared for this meeting, which was formulated prior to the release of the advance estimates of the third-quarter national income and product accounts, the staff revised up its estimate of aggregate economic activity in the third quarter from its forecast presented at the September meeting in light of available indicators that suggested that consumer spending, business investment, and exports were stronger than previously expected. Nonetheless, the staff expected real GDP growth to be considerably slower in the fourth quarter, reflecting steepening declines in residential construction, reductions in the pace of motor vehicle production, and a smaller contribution from net exports. Looking forward, the staff expected residential investment to remain weak in 2008 with modest declines in house prices. In addition, the staff continued to expect the stress in credit markets and the appreciably higher oil prices indicated by futures markets to restrain spending by businesses and consumers, although the lower foreign exchange value of the dollar suggested some boost to net exports. On balance, real GDP growth for 2008 was projected to slow to a pace a bit below that of its potential, and unemployment was expected to creep up slightly. For 2009, the forecast called for real output growth to step up to a pace slightly above potential as the drags on economic activity exerted by the contraction in residential investment and financial strains were expected to abate. The staff’s forecast for core PCE inflation was little changed from that presented at the September meeting because favorable incoming figures on core PCE inflation were offset by expectations for some limited feed-through into retail prices of recent increases in energy prices and for slightly less easing in resource utilization. The forecast for headline inflation was in the same range as that for core inflation in 2008 and 2009, reflecting expectations that energy prices would level off and then turn down and that increases in food prices would slow to a pace more in line with core inflation. The advance data on the national income and product accounts for the third quarter, which were released on the morning of the second day of the FOMC meeting, indicated a stronger increase in real GDP than the staff had forecast, mostly because inventory investment was estimated to be higher than projected by the staff. The staff interpreted this information as suggesting some upward revision to its estimate of output growth in the third quarter, a small downward revision to its forecast of growth in the current quarter, and no significant change to its forecast for coming quarters. In conjunction with the FOMC meeting in October, all meeting participants (Federal Reserve Board members and Reserve Bank presidents) provided annual projections for economic growth, unemployment, and inflation for the period 2007 through 2010. The projections are described in the Summary of Economic Projections, which is attached as an addendum to these minutes. In their discussion of the economic outlook and situation, and in the projections that they had submitted for this meeting, participants noted that economic activity had expanded at a somewhat faster pace in the third quarter than previously anticipated and that there was scant evidence of negative spillovers from the ongoing housing correction to other sectors of the economy. Conditions in financial markets had improved since the September FOMC meeting, but functioning in a number of markets remained strained. Even with some further easing of monetary policy, participants expected economic growth to slow over the next few quarters, reflecting continued sharp declines in the housing sector and tighter lending standards and terms across a broad range of credit products. The slowing of growth was likely to produce a modest increase in the unemployment rate from its recent levels, leading to the emergence of a little slack in labor markets. Looking further ahead, participants noted that economic growth should increase gradually to around its trend rate by 2009 as weakness in the housing sector abated and stresses in financial markets subsided. With aggregate demand showing somewhat greater than expected strength in the third quarter and little evidence of significant spillovers from the housing sector to other components of spending, participants viewed the downside risks to growth as somewhat smaller than at the time of the September meeting, but those risks were still seen as significant. Participants generally expected that inflation would edge down over the next few years, a projection consistent with the recent string of encouraging releases on core consumer prices, futures prices pointing to a flattening of energy costs, and the anticipated easing of pressures on resources. Nonetheless, some upside risks to inflation remained, reflecting in part the potential feed-through to inflation expectations of increases in energy and import prices. Financial market functioning was judged to have improved somewhat since the previous FOMC meeting, but the situation in a number of markets remained strained, and credit market conditions were thought likely to weigh on economic growth over coming quarters. In light of some improvement in the commercial paper and leveraged loan markets over the intermeeting period, participants were somewhat less concerned that banks would not have sufficient balance-sheet capacity to absorb large volumes of assets. Conditions in corporate credit markets also had improved in recent weeks, and most businesses were apparently having little difficulty raising external funds, as evidenced by strong issuance of investment-grade corporate bonds, a pickup in speculative-grade issuance, and surging C&I loans. Markets for nonconforming mortgages, by contrast, remained disrupted. Meeting participants also mentioned that while financial market conditions had improved, the functioning of some markets remained somewhat impaired. Indeed, several participants noted some relapse in financial conditions late in the intermeeting period. Moreover, unusual pressures in funding markets persisted. Participants generally viewed financial markets as still fragile and were concerned that an adverse shock--such as a sharp deterioration in credit quality or disclosure of unusually large and unanticipated losses--could further dent investor confidence and significantly increase the downside risks to the economy. Participants were also concerned about a potential scenario in which unexpected economic weakness could cause a further tightening of credit conditions that could in turn reinforce weakness in aggregate demand. In their discussion of individual sectors of the economy, participants noted that the recent declines in housing activity--while substantial--had largely been anticipated. Nonetheless, the potential for significant further weakening in housing activity and home prices represented a downside risk to the economic outlook. Most participants pointed to the deterioration in nonprime mortgage markets as well as higher interest rates and tighter credit standards for prime nonconforming mortgages as factors that had exacerbated the deterioration in housing markets, and they noted that these developments could further limit the availability of mortgage credit and depress the demand for housing. Some participants also pointed to downside risks to the housing market stemming from the large volume of substantial upward interest-rate resets that were likely on subprime mortgages in coming quarters, which could lead to a faster pace of foreclosures in the near term, thereby intensifying the downward pressure on house prices. Participants generally agreed that the available data suggested that consumer spending had been well maintained over the past several months and that spillovers from the strains in the housing market had apparently been quite limited to date. Nevertheless, a number of participants cited notable declines in survey measures of consumer confidence since the onset of financial turbulence in mid-summer, along with sharply higher oil prices, declines in house prices, and tighter underwriting standards for home equity loans and some types of consumer loans, as factors likely to restrain consumer spending going forward. Moreover, anecdotal reports by business contacts suggested a softening in retail sales in some regions of the country. Participants expressed a concern that larger-than-expected declines in house prices could further sap consumer confidence as well as net worth, causing a pullback in consumer spending. All told, however, participants envisioned that the most likely scenario was for consumer spending to continue to advance at a moderate rate in coming quarters, supported by the generally strong labor market and further gains in real personal income. Meeting participants noted that capital expenditures had grown at a solid pace in recent months and that the financial turmoil generally appeared to have had a limited effect on business capital spending plans to date. Nevertheless, business sentiment appeared to have eroded somewhat amid heightened economic and financial uncertainty, potentially restraining investment outlays in some industries. However, participants noted that conditions in corporate bond markets had improved since the September FOMC meeting, and that credit availability generally appeared to be ample, albeit on somewhat tighter terms. Participants judged that moderate growth of investment outlays going forward was the most likely outcome. A number of participants saw downside risk to the outlook for nonresidential building activity, reflecting elevated spreads on commercial-mortgage-backed securities and a further tightening of banks’ lending standards for commercial real estate loans. Data on economic growth outside the United States indicated that the global expansion, though likely to slow somewhat in coming quarters, was nevertheless on a firm footing. The continued strength of global growth and the recent decline in the foreign exchange value of the dollar were seen as likely to support U.S. exports going forward. Readings on core inflation received during the intermeeting period continued to be generally favorable, and meeting participants agreed that the recent moderation in core inflation would likely be sustained. The slower pace of economic expansion anticipated for the next few quarters would help ease inflationary pressures. Nonetheless, participants expressed concern about the upside risks to the outlook for inflation. The recent increases in the prices of energy and other commodities, along with the significant decline in the foreign exchange value of the dollar, were cited as factors that could exert upward pressure on prices of some core goods and services in the near term. Increases in unit labor costs also could add to inflationary pressures. Moreover, participants expressed concern that some measures of inflation compensation calculated from TIPS securities had risen this year, although they viewed inflation expectations generally as remaining contained. Participants were concerned that if headline inflation remained above core measures for a sustained period, then longer-term inflation expectations could move higher, a development that could lead to greater inflation pressures over the longer term and be costly to reverse. In the Committee’s discussion of policy for the intermeeting period, members discussed the relative merits of lowering the target federal funds rate 25 basis points, to 4-1/2 percent, at this meeting or awaiting additional information on prospects for economic activity and inflation before assessing whether a further adjustment in the stance of monetary policy was necessary. Many members noted that this policy decision was a close call. However, on balance, nearly all members supported a 25 basis point reduction in the target federal funds rate. The stance of monetary policy appeared still to be somewhat restrictive, partly because of the effects of tighter credit conditions on aggregate demand. Moreover, most members saw substantial downside risks to the economic outlook and judged that a rate reduction at this meeting would provide valuable additional insurance against an unexpectedly severe weakening in economic activity. Many members were concerned about the still-sensitive state of financial markets and thought that an easing of policy would help to support improvements in market functioning, thereby mitigating some of the downside risks to economic growth. With real GDP likely to expand below its potential over coming quarters, recent price trends favorable, and inflation expectations appearing reasonably well anchored, the easing of policy at this meeting seemed unlikely to affect adversely the outlook for inflation. A number of members noted that the recent policy moves could readily be reversed if circumstances evolved in a manner that would warrant such action. The Committee agreed that the statement to be released at this meeting should indicate that economic growth was solid in the third quarter and that strains in financial markets had eased somewhat on balance. Members also agreed that economic growth seemed likely to slow over coming quarters, but that the easing action taken at the meeting--combined with the 50 basis point cut in the target federal funds rate at the September meeting--should help to promote moderate growth over time, although some downside risks to growth would remain. Members felt that it was appropriate to underscore the upside risks to inflation stemming from the recent increases in the prices of energy and other commodities, even though recent readings on core inflation had been favorable. While the Committee saw uncertainty regarding the economic outlook as still elevated, it judged that, after this action, the upside risks to inflation roughly balanced the downside risks to growth. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: “The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee in the immediate future seeks conditions in reserve markets consistent with reducing the federal funds rate to an average of around 4-1/2 percent.” The vote encompassed approval of the statement below to be released at 2:15 p.m.: “The Federal Open Market Committee decided today to lower its target for the Federal funds rate 25 basis points to 4-1/2 percent. Economic growth was solid in the third quarter, and strains in financial markets have eased somewhat on balance. However, the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction. Today’s action, combined with the policy action taken in September, should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and promote moderate growth over time. Readings on core inflation have improved modestly this year, but recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully. The Committee judges that, after this action, the upside risks to inflation roughly balance the downside risks to growth. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.” Votes for this action: Messrs. Bernanke, Geithner, Evans, Kohn, Kroszner, Mishkin, Poole, Rosengren, and Warsh. Votes against this action: Mr. Hoenig. Mr. Hoenig dissented because he believed that policy should remain unchanged at this meeting. Projections for the U.S. and global economies suggested that growth was likely to proceed at a reasonable pace over the outlook period. To better assure that outcome, the FOMC had moved rates down significantly at its September meeting. At this meeting, inflation risks appeared elevated and Mr. Hoenig felt that the target federal funds rate was currently close to neutral. In these circumstances, he judged that policy needed to be slightly firm to better hold inflation in check. Going forward, if the data suggested the Committee needed to ease further, it could do so. He also recognized that liquidity remains a near-term challenge and that the Federal Reserve would be prepared to act if needed. Mr. Hoenig saw the risks to both economic growth and inflation to be elevated and preferred to wait, watch, and be ready to act depending on how events developed. The Committee then resumed its discussion of an enhanced role for the economic projections that are made periodically by the members of the Board of Governors and the Reserve Bank presidents. At this meeting, participants reached a consensus on increasing the frequency and expanding the content of the projections that in the past have been released to the public in summary form twice a year. They agreed to publish with the minutes a summary of participants’ economic projections made for this meeting and to release a press statement describing the plan for the future. The release of more frequent forecasts covering longer time spans and accompanied by explanations of those forecasts was seen as providing the public with more context for understanding the Committee’s monetary policy decisions. It was agreed that the next meeting of the Committee would be held on Tuesday, December 11, 2007. The meeting adjourned at 12:00 noon. Notation Vote By notation vote completed on October 5, 2007, the Committee unanimously approved the minutes of the FOMC meeting held on September 18, 2007 and of the conference calls on August 10, 2007 and August 16, 2007. Brian F. MadiganSecretary   Return to top

2007-10-31

Statement

The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 4-1/2 percent. Economic growth was solid in the third quarter, and strains in financial markets have eased somewhat on balance.  However, the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction.  Today’s action, combined with the policy action taken in September, should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and promote moderate growth over time. Readings on core inflation have improved modestly this year, but recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation.  In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.  The Committee judges that, after this action, the upside risks to inflation roughly balance the downside risks to growth.  The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth. Voting for the FOMC monetary policy action were:  Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; William Poole; Eric S. Rosengren; and Kevin M. Warsh.  Voting against was Thomas M. Hoenig, who preferred no change in the federal funds rate at this meeting. In a related action, the Board of Governors unanimously approved a 25-basis-point decrease in the discount rate to 5 percent.  In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Richmond, Atlanta, Chicago, St. Louis, and San Francisco.

2007-10-09

Minute

Minutes of the Federal Open Market Committee September 18, 2007 A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, September 18, 2007 at 8:30 a.m. Present:Mr. Bernanke, Chairman Mr. Geithner, Vice Chairman Mr. Evans Mr. Hoenig Mr. Kohn Mr. Kroszner Mr. Mishkin Mr. Poole Mr. Rosengren Mr. WarshMr. Fisher, Ms. Pianalto, and Messrs. Plosser and Stern, Alternate Members of the Federal Open Market Committee Messrs. Lacker and Lockhart, and Ms. Yellen, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco, respectively Mr. Madigan, Secretary and Economist Ms. Danker, Deputy Secretary Ms. Smith, Assistant Secretary Mr. Skidmore, Assistant Secretary Mr. Alvarez, General Counsel Mr. Baxter, Deputy General Counsel Ms. Johnson, Economist Mr. Stockton, Economist Messrs. Clouse, Connors, Fuhrer, Kamin, Rasche, Slifman, and Wilcox, Associate Economists Mr. Dudley, Manager, System Open Market Account Ms. J. Johnson, 1 Secretary, Office of the Secretary, Board of Governors Mr. Frierson, 1 Deputy Secretary, Office of the Secretary, Board of Governors Ms. Bailey 1 and Mr. Roberts, 1 Deputy Directors, Division of Banking Supervision and Regulation, Board of Governors Mr. English, Senior Associate Director, Division of Monetary Affairs, Board of Governors Ms. Liang and Mr. Reifschneider, Associate Directors, Division of Research and Statistics, Board of Governors Mr. Wright, Deputy Associate Director, Division of Monetary Affairs, Board of Governors Mr. G. Evans, 1 Assistant Director, Division of Reserve Bank Operations and Payment Systems, Board of Governors Mr. Blanchard, Assistant to the Board, Office of Board Members, Board of Governors Mr. Oliner, Senior Adviser, Division of Research and Statistics, Board of Governors Mr. Meyer, Visiting Reserve Bank Officer, Division of Monetary Affairs, Board of Governors Mr. Small, Project Manager, Division of Monetary Affairs, Board of Governors Mr. Natalucci, Senior Economist, Division of Monetary Affairs, Board of Governors Mr. Luecke, Senior Financial Analyst, Division of Monetary Affairs, Board of Governors Ms. Beattie, 1 Assistant to the Secretary, Office of the Secretary, Board of Governors Ms. Low, Open Market Secretariat Specialist, Division of Monetary Affairs, Board of Governors Ms. Holcomb, First Vice President, Federal Reserve Bank of Dallas Messrs. Judd, Rosenblum, and Sniderman, Executive Vice Presidents, Federal Reserve Banks of San Francisco, Dallas, and Cleveland, respectively Messrs. Dzina and Hakkio, Mses. Krieger 1 and Mester, and Messrs. Rolnick and Weinberg, Senior Vice Presidents, Federal Reserve Banks of New York, Kansas City, New York, Philadelphia, Minneapolis, and Richmond, respectively Messrs. Krane, Peach, and Robertson, Vice Presidents, Federal Reserve Banks of Chicago, New York, and Atlanta, respectively 1.  Attended portion of the meeting relating to the discussion of approaches to stabilizing money markets. Return to textIn the agenda for this meeting, it was reported that advices of the election of Charles L. Evans as a member of the Federal Open Market Committee had been received and that he had executed his oath of office. By unanimous vote, the Federal Open Market Committee selected James A. Clouse and Daniel G. Sullivan to serve as Associate Economists until the selection of their successors at the first regularly scheduled meeting of the Committee in 2008. The Manager of the System Open Market Account (SOMA) reported on recent developments in foreign exchange markets. There were no open market operations in foreign currencies for the System's account in the period since the previous meeting. The Manager also reported on developments in domestic financial markets and on System open market operations in government securities and federal agency obligations during the period since the previous meeting. By unanimous vote, the Committee ratified these transactions. The information reviewed at the September meeting suggested that economic activity advanced at a moderate rate early in the third quarter. After expanding at a robust pace in July, retail sales rose at a somewhat slower rate in August. Orders and shipments of capital goods posted solid gains in July. However, residential investment weakened further, even before the recent disruptions in mortgage markets. In addition, private payrolls posted only a small gain in August, and manufacturing production decreased after gains in the previous two months. Meanwhile, core inflation rose a bit from the low rates observed in the spring but remained moderate through July. Private nonfarm payroll employment rose only modestly in August, and the levels of employment in June and July were revised down. The weakness in employment was spread fairly widely across industries. Residential construction and manufacturing posted noticeable declines in jobs, employment in wholesale trade and transportation was little changed, and hiring at business services was well below recent trends. Both the average workweek and aggregate hours were unchanged in August. The unemployment rate held steady at 4.6 percent, 0.1 percentage point above its second-quarter level and equal to its 2006 average. After posting solid gains in June and July, total industrial production edged up only a bit in August. This increase was attributable to a surge in electricity generation, as temperatures swung from mild in July to very warm in August. After large gains in the preceding two months, manufacturing output declined in August, held down by a decrease in the production of motor vehicles and parts. High-tech output rose only modestly in August, but production gains in June and July were revised up considerably. Consumer spending appeared to have strengthened early in the summer from its subdued second-quarter pace. Although auto sales were weak in July, real outlays for other goods rose briskly. At the same time, spending on services was up moderately despite a drop in outlays for energy associated with relatively cool weather in the eastern part of the United States. In August, consumption appeared to have posted another solid gain. Although nominal retail sales outside the motor vehicle sector were about flat (abstracting from a drop in nominal sales at gasoline stations associated with falling gas prices), vehicle sales stepped up and warmer weather likely caused an increase in energy usage. Real disposable income rose further in July, as wages and salaries posted a strong gain and energy prices came down. However, household wealth likely was providing a diminishing impetus to the pace of spending, reflecting recent declines in stock market wealth and an apparent further deceleration in house prices. Readings on consumer sentiment turned down in August after having risen in July, and the Reuters/Michigan index remained near its relatively low August level in early September. The housing sector remained exceptionally weak. Home sales had dropped considerably this year: Sales of new and existing single-family homes in July were down substantially from their averages over the second half of last year. Demand was restrained by deteriorating conditions in the subprime mortgage market and by an increase in rates for thirty-year fixed-rate conforming mortgages. In the nonconforming mortgage market, the availability of financing to borrowers recently appeared to have been crimped even further. Most forward-looking indicators of housing demand, including an index of pending home sales, pointed to a further deterioration in sales in the near term. Single-family starts slid in July to their lowest reading since 1996, and adjusted permit issuance continued on a downward trajectory. Although single-family housing starts had come down substantially from their peak, the drop had lagged the decline in demand, and as a result, inventories of new homes had risen considerably. In the multifamily sector, starts in July were in line with readings thus far this year and at the low end of the fairly narrow range seen since 1997. Meanwhile, house prices generally continued to decelerate. Orders and shipments of capital goods posted a strong gain early in the third quarter. In particular, orders and shipments of equipment outside the high-tech and transportation sector registered a robust increase in July, and data on computer production and shipments of high-tech goods pointed to solid increases in business demand for high-tech. In contrast, indicators of spending for transportation equipment were mixed. Aircraft shipments in July and public information on Boeing's deliveries suggested that domestic spending on aircraft was retreating somewhat in the current quarter. While fleet sales of light vehicles appeared to have moved up in July and August, sales of medium and heavy trucks remained below the second-quarter average. More generally, surveys of business conditions suggested that increases in business activity were somewhat slower in August than in the second quarter. Book-value data for the manufacturing and trade sectors excluding motor vehicles and parts suggested that inventory accumulation stepped down noticeably in July from the second-quarter pace. Inventories of light motor vehicles rose again in July and August. The number of manufacturing purchasing managers who viewed their customers' inventory levels as too low in August slightly exceeded the number who saw them as too high. The U.S. international trade deficit narrowed slightly in July, as exports increased more than imports. Sharp increases in exports of both aircraft and automobiles contributed importantly to the overall gain. Exports of agricultural products and consumer goods were also strong. In contrast, exports of industrial supplies and semiconductors exhibited declines. The value of imported goods and services was boosted by a large increase in imports of automotive products. Higher imports of capital goods excluding aircraft, computers, and semiconductors and of oil also contributed to the overall gain in imports. Economic growth slowed in the second quarter in most advanced foreign economies, except the United Kingdom. The step-down was most pronounced in Japan, where GDP contracted, but was also substantial in the euro area, where total domestic demand rose only slightly. Although growth remained robust in Canada, data late in the quarter, including retail sales, indicated a more significant weakening in activity. This softness appeared to have continued into the third quarter in some economies. In July, indicators for Europe generally moderated, on balance, from their second-quarter levels; those for Canada and Japan, however, slowed more notably. Most of the readings available on economic developments after August 9, when financial turmoil intensified, were measures of confidence. They dropped, on average, but otherwise were consistent with the indicators reported for July. Data through July suggested that economic activity in emerging-market countries remained robust. Output in the Asian economies soared in the second quarter, and several countries posted growth at or near double-digit rates. In Latin America, output in Mexico and Venezuela rebounded sharply from earlier weakness. Indicators for China in July pointed to only a modest slowing of output growth from its torrid pace in the first half of the year. The scant data for August received thus far provided little indication that the turmoil in financial markets had a significant negative impact on real economic activity in emerging-market economies. After rapid price increases earlier this year, U.S. headline consumer price inflation was moderate in both June and July. Although food prices continued their string of sizable increases, energy prices fell in June and July and gasoline prices appear to have dropped further in August. Core PCE prices rose 0.2 percent in June and 0.1 percent in July. On a twelve-month-change basis, core PCE inflation in July was below the comparable rate twelve months earlier. Step-downs in price inflation for prescription drugs, motor vehicles, and nonmarket services accounted for nearly all of the deceleration in core PCE prices. Although owners' equivalent rent decelerated over the past year, this change was largely offset by an acceleration in tenants' rent and lodging away from home. Household surveys indicated that the median expectation for year-ahead inflation declined in August and edged down further in early September to a level only slightly above the reading at the turn of the year; the median expectation of longer-term inflation in early September remained in the range seen over the past couple of years. The producer price index for core intermediate materials rose only modestly in July. Compensation per hour decelerated in the second quarter. Nonetheless, the increase over the four quarters ending in the second quarter was noticeably above the increase in the preceding four quarters and well above the rise in the employment cost index over the same period. At its August meeting, the FOMC decided to maintain its target for the federal funds rate at 5-1/4 percent. In the statement, the Committee acknowledged that financial markets had been volatile in recent weeks, credit conditions had become tighter for some households and businesses, and the housing correction was ongoing. The Committee reiterated its view that the economy seemed likely to continue to expand at a moderate pace over coming quarters, supported by solid growth in employment and incomes and a robust global economy. Readings on core inflation had improved modestly in recent months. However, a sustained moderation in inflation pressures had yet to be convincingly demonstrated. Moreover, the high level of resource utilization had the potential to sustain these pressures. Although the downside risks to growth had increased somewhat, the Committee repeated that its predominant policy concern remained the risk that inflation would fail to moderate as expected. Future policy adjustments would depend on the outlook for both inflation and economic growth, as implied by incoming information. The FOMC's policy decision and the accompanying statement were about in line with market expectations, and reactions in financial markets were muted. In the days after the August FOMC meeting, financial market participants appeared to become more concerned about liquidity and counterparty credit risk. Unsecured bank funding markets showed signs of stress, including volatility in overnight lending rates, elevated term rates, and illiquidity in term funding markets. On August 10, the Federal Reserve issued a statement announcing that it was providing liquidity to facilitate the orderly functioning of financial markets. The Federal Reserve indicated that it would provide reserves as necessary through open market operations to promote trading in the federal funds market at rates close to the target rate of 5-1/4 percent. The Federal Reserve also noted that the discount window was available as a source of funding. On August 17, the FOMC issued a statement noting that financial market conditions had deteriorated and that tighter credit conditions and increased uncertainty had the potential to restrain economic growth going forward. The FOMC judged that the downside risks to growth had increased appreciably, indicated that it was monitoring the situation, and stated that it was prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets. Simultaneously, the Federal Reserve Board announced that, to promote the restoration of orderly conditions in financial markets, it had approved a 50 basis point reduction in the primary credit rate to 5-3/4 percent. The Board also announced a change to the Reserve Banks' usual practices to allow the provision of term financing for as long as thirty days, renewable by the borrower. In addition, the Board noted that the Federal Reserve would continue to accept a broad range of collateral for discount window loans, including home mortgages and related assets, while maintaining existing collateral margins. On August 21, the Federal Reserve Bank of New York announced some temporary changes to the terms and conditions of the SOMA securities lending program, including a reduction in the minimum fee. The effective federal funds rate was somewhat below the target rate for a time over the intermeeting period, as efforts to keep the funds rate near the target were hampered by technical factors and financial market volatility. In the days leading up to the FOMC meeting, however, the funds rate traded closer to the target. Short-term financial markets came under pressure over the intermeeting period amid heightened investor unease about exposures to subprime mortgages and to structured credit products more generally. Rates on asset-backed commercial paper and on low-rated unsecured commercial paper soared, and some issuers, particularly asset-backed commercial paper programs with investments in subprime mortgages, found it difficult to roll over maturing paper. These developments led several programs to draw on backup lines, exercise options to extend the maturity of outstanding paper, or even default. As a result, asset-backed commercial paper outstanding contracted substantially. Investors sought the safety and liquidity of Treasury securities, and yields on Treasury bills dropped sharply for a period; trading conditions in the bill market were impaired at times. Meanwhile, banks took measures to conserve their liquidity and were cautious about counterparties' exposures to asset-backed commercial paper. Term interbank funding markets were significantly impaired, with rates rising well above expected future overnight rates and traders reporting a substantial drop in the availability of term funding. Pressures eased a bit in mid-September, but short-term financial markets remained strained. Conditions in corporate credit markets were mixed. Investment- and speculative-grade corporate bond spreads edged up; they were near their highest levels in four years, although they remained far below the peaks seen in mid-2002. Investment-grade bond issuance was strong in August as yields declined, but issuance of speculative-grade bonds was scant. Speculative-grade bond deals and leveraged loans slated to finance leveraged buyouts continued to be delayed or restructured. Bank lending to businesses surged in August, apparently because some banks funded leveraged loans that they had intended to syndicate to institutional investors and perhaps because some firms substituted bank credit for commercial paper. Although markets for nonconforming mortgages were impaired over the intermeeting period, the supply of conforming mortgages seemed to have been largely unaffected by recent developments. Broad stock price indexes were volatile but about unchanged, on net, over the intermeeting period. The foreign exchange value of the dollar against other major currencies fell, on balance. Investors appeared to mark down significantly their expected path for the federal funds rate during the intermeeting period, evidently in response to the strains in money and credit markets and a few key data releases, including weaker-than-expected reports on housing activity and employment. Yields on nominal Treasury securities fell appreciably across the term structure. TIPS-based inflation compensation at the five-year horizon was about unchanged, while inflation compensation at longer horizons crept higher. Growth of nonfinancial domestic debt was estimated to have slowed a little in the third quarter from the average pace in the first half of the year. The deceleration in total nonfinancial debt reflected a projected slowdown in borrowing across all major sectors of the economy excluding the federal government. Although it decelerated in the third quarter, business-sector debt continued to advance at a solid pace, boosted by a surge in business loans. In the household sector, mortgage borrowing was estimated to have slowed notably, as mortgage interest rates moved up, nonconforming mortgages became harder to obtain, and as home sales slowed and house prices decelerated. M2 increased at a brisk pace in August. The rise was led by a surge in liquid deposits and in retail money funds as investors adjusted their portfolios in response to the turmoil in financial markets. In preparation for this meeting, the staff continued to estimate that real GDP increased at a moderate rate in the third quarter. However, the staff marked down the fourth-quarter forecast, reflecting a judgment that the recent financial turbulence would impose restraint on economic activity in coming months, particularly in the housing sector. The staff also trimmed its forecast of real GDP growth in 2008 and anticipated a modest increase in unemployment. Softer demand for homes amid a reduction in the availability of mortgage credit would likely curtail construction activity through the middle of next year. Moreover, lower housing wealth, slower gains in employment and income, and reduced confidence seemed likely to restrain consumer spending in 2008. Despite the recent difficulties in some corporate credit markets, financial conditions confronting most nonfinancial businesses did not appear to have tightened appreciably to date. But going forward, the staff anticipated that businesses would scale back their capital spending a touch in response to financing conditions that were likely to become a little less accommodative and to more modest gains in sales. With credit markets expected to largely recover over coming quarters, growth of real GDP was projected to firm in 2009 to a pace a bit above the rate of growth of its potential. Incoming data on consumer price inflation that were slightly to the low side of the previous forecast, in combination with the easing of pressures on resource utilization in the current forecast, led the staff to trim slightly its forecast for core PCE inflation. Headline PCE inflation, which was boosted by sizable increases in energy and food prices earlier in the year, was expected to slow in 2008 and 2009. In their discussion of the economic situation and outlook, meeting participants focused on the potential for recent credit market developments to restrain aggregate demand in coming quarters. The disruptions to the market for nonconforming mortgages were likely to reduce further the demand for housing, and recent financial developments could well lead to a more general tightening of credit availability. Moreover, some recent data and anecdotal information pointed to a possible nascent slowdown in the pace of expansion. Given the unusual nature of the current financial shock, participants regarded the outlook for economic activity as characterized by particularly high uncertainty, with the risks to growth skewed to the downside. Some participants cited concerns that a weaker economy could lead to a further tightening of financial conditions, which in turn could reinforce the economic slowdown. But participants also noted that the resilience of the economy in the face of a number of previous periods of financial market disruptions left open the possibility that the macroeconomic effects of the financial market turbulence would prove limited. Although financial markets were expected to stabilize over time, participants judged that credit markets were likely to restrain economic growth in the period ahead. Given existing commitments to customers and the increased resistance of investors to purchasing some securitized products, banks might need to take a large volume of assets onto their balance sheets over coming weeks, including leveraged loans, asset-backed commercial paper, and some types of mortgages. Banks' concerns about the implications of rapid growth in their balance sheets for their capital ratios and for their liquidity, as well as the recent deterioration in various term funding markets, might well lead banks to tighten the availability of credit to households and firms. Tighter credit conditions were likely to weigh particularly on residential investment and to a lesser extent on other components of aggregate demand in coming quarters. Meeting participants also noted that financial market conditions, while seeming to have improved somewhat in the most recent days, were still fragile and that further adverse credit market developments could well increase the downside risks to the economy. Even after market volatility subsided and the recent strains eased, risk spreads probably would be wider and credit terms tighter than they had been a few months ago. Although these developments would likely be consistent with longer-term financial stability, they were likely to exert some restraint on aggregate demand. In their discussion of individual sectors of the economy, participants noted that recent data suggested greater weakness in the housing market than had previously been expected. Furthermore, recent financial developments had the potential to deepen further and prolong the downturn in the housing market, as subprime mortgages remained essentially unavailable, little activity was evident in the markets for other nonprime mortgages, and prime jumbo mortgage borrowers faced higher rates and tighter lending standards. The faster pace of foreclosures as subprime mortgage rates reset was also seen as posing a downside risk to the housing market. Nonetheless, participants observed that conforming mortgages remained readily available to creditworthy borrowers and that rates on these mortgages had declined in recent weeks. Moreover, conditions in the jumbo mortgage market were expected to improve gradually over time. Although employment probably was not as weak as the most recent monthly data had suggested, trend growth in jobs had fallen off even prior to the recent financial market strains, and participants judged that some further slowing of employment growth was likely. Indeed, financial services firms had already announced layoffs, largely reflecting mortgage market developments, the demand for temporary workers appeared to have softened, and the most recent weakening in construction employment was likely to continue for a while. Moreover, if declines in house prices were to damp consumption, that could feed back on employment and income, exerting additional restraint on the demand for housing. Nonetheless, to date, initial claims for unemployment insurance did not indicate a substantial and widespread weakening in labor demand, and labor markets across the country generally remained fairly tight, with several participants citing continued reports of shortages of labor from their contacts in some sectors. Participants thought that the most likely prospect was for consumer expenditures to continue to expand at a moderate pace on average over coming quarters, supported by growth in employment and income. However, some participants saw indications of a possible weakening of consumer spending. Sales of automobiles and building materials had flagged of late, and survey measures suggested that consumer confidence had been adversely affected by the recent financial market developments. Also, a further tightening of terms for home equity lines of credit and second mortgages seemed possible, which could weigh on consumer spending, especially for consumer durables. Participants reported that recent financial market developments generally appeared to have had limited effects to date on business capital spending plans and expected that business investment was likely to remain healthy in coming quarters. The access of investment-grade corporate borrowers to credit so far remained unimpeded, and rates on investment-grade bonds had declined in recent weeks. Moreover, participants noted that many capital expenditures were internally financed, making them less sensitive to credit market conditions. Nonetheless, the pace of financing for lower-rated firms--including issuance of both speculative-grade bonds and leveraged loans--had slowed sharply over the summer. Participants also noted that standards and terms for commercial real estate credit reportedly had tightened, and that credit availability for homebuilders could be trimmed going forward. In addition, contacts indicated that business executives in parts of the country had apparently become somewhat more cautious and that some were delaying investment outlays in view of heightened economic and financial uncertainty. Some participants noted that foreign demand remained robust and net exports appeared strong. Port utilization rates reportedly remained high. Participants discussed the turbulence in foreign financial markets and noted that unusually high precautionary demand for dollar-denominated term funding in Europe had added to strains in U.S. interbank markets and contributed to a wide spread between libor and federal funds rates. Participants made only modest revisions to their outlook for inflation in the period since the Committee's last regular meeting. Still, they recognized that incoming data on core inflation continued to be favorable, and they generally were a little more confident that the decline in inflation earlier this year would be sustained. Inflation expectations seemed to be contained, and the less robust economic outlook implied somewhat less pressure on resources going forward. Participants nonetheless remained concerned about possible upside risks to inflation. Higher benefit costs, rising unit labor costs more generally, reduced markups, and levels of resource utilization both in the United States and abroad that remained relatively high were all cited as factors that could contribute to inflationary pressures. Inflation risks could be heightened if the dollar were to continue to depreciate significantly. In the Committee's discussion of policy for the intermeeting period, all members favored an easing of the stance of monetary policy. Members emphasized that because of the recent sharp change in credit market conditions, the incoming data in many cases were of limited value in assessing the likely evolution of economic activity and prices, on which the Committee's policy decision must be based. Members judged that a lowering of the target funds rate was appropriate to help offset the effects of tighter financial conditions on the economic outlook. Without such policy action, members saw a risk that tightening credit conditions and an intensifying housing correction would lead to significant broader weakness in output and employment. Similarly, the impaired functioning of financial markets might persist for some time or possibly worsen, with negative implications for economic activity. In order to help forestall some of the adverse effects on the economy that might otherwise arise, all members agreed that a rate cut of 50 basis points at this meeting was the most prudent course of action. Such a measure should not interfere with an adjustment to more realistic pricing of risk or with the gains and losses that implied for participants in financial markets. With economic growth likely to run below its potential for a while and with incoming inflation data to the favorable side, the easing of policy seemed unlikely to affect adversely the outlook for inflation. The Committee agreed that the statement to be released after the meeting should indicate that the outlook for economic growth had shifted appreciably since the Committee's last regular meeting but that the 50 basis point easing in policy should help to promote moderate growth over time. They also agreed that the inflation situation seemed to have improved slightly and judged that it was no longer appropriate to indicate that a sustained moderation in inflation pressures had yet to be shown. Nonetheless, all agreed that some inflation risks remained and that the statement should indicate that the Committee would continue to monitor inflation developments carefully. Given the heightened uncertainty about the economic outlook, the Committee decided to refrain from providing an explicit assessment of the balance of risks, as such a characterization could give the mistaken impression that the Committee was more certain about the economic outlook than was in fact the case. Future actions would depend on how economic prospects were affected by evolving market developments and by other factors. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee in the immediate future seeks conditions in reserve markets consistent with reducing the federal funds rate to an average of around 4-3/4 percent." The vote encompassed approval of the text below for inclusion in the statement to be released at 2:15 p.m.: "Developments in financial markets since the Committee's last regular meeting have increased the uncertainty surrounding the economic outlook. The Committee will continue to assess the effects of these and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth." Votes for this action: Messrs. Bernanke, Geithner, Evans, Hoenig, Kohn, Kroszner, Mishkin, Poole, Rosengren, and Warsh. Votes against this action: None. The Committee then resumed its discussion of monetary policy communication issues. Subsequently, in a joint session of the Federal Open Market Committee and the Board of Governors, Board members and Reserve Bank presidents discussed additional policy options to address strains in money markets. No decisions were made in this session, but it was agreed that policymakers should continue to consider such options carefully. It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, October 30-31, 2007. The meeting adjourned at 3:55 p.m. Notation Vote By notation vote completed on August 27, 2007, the Committee unanimously approved the minutes of the FOMC meeting held on August 7, 2007. Conference Calls On August 10, 2007, the Committee reviewed developments in money and credit markets, where strains had worsened in the days since its last meeting. Participants discussed the condition of domestic and foreign financial markets, the Open Market Desk's approach to open market operations, possible adjustments to the discount rate, and the statement to be issued immediately after the conference call. On August 16, 2007, the Committee again met by conference call. With financial market conditions having deteriorated further, meeting participants discussed the potential usefulness of various policy responses. The discussion focused primarily on changes associated with the discount window that would be directed at improving the functioning of the money markets. Most participants expressed strong support for taking such steps, although some concern was noted about the likely effectiveness of these measures and one participant also questioned their appropriateness. In light of the risks posed to the economic outlook by the tighter credit conditions and the increased uncertainty in financial markets, the Committee felt that the downside risks to growth had increased appreciably, but that a change in the federal funds rate target was not yet warranted. However, the situation bore close watching. At the conclusion of the discussion, the Committee voted to approve the text below to be released the following morning: "Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward. In these circumstances, although recent data suggest that the economy has continued to expand at a moderate pace, the Federal Open Market Committee judges that the downside risks to growth have increased appreciably. The Committee is monitoring the situation and is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets." Votes for: Messrs. Bernanke, Geithner, Fisher, Hoenig, Kohn, Kroszner, Mishkin, Moskow, Rosengren, and Warsh. Votes against: None. Mr. Fisher voted as alternate member. Brian F. Madigan Secretary

2007-09-18

Statement

The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 4-3/4 percent. Economic growth was moderate during the first half of the year, but the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally.  Today’s action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time.  Readings on core inflation have improved modestly this year.  However, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.  Developments in financial markets since the Committee’s last regular meeting have increased the uncertainty surrounding the economic outlook.  The Committee will continue to assess the effects of these and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth. Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; William Poole; Eric Rosengren; and Kevin M. Warsh.   In a related action, the Board of Governors unanimously approved a 50-basis-point decrease in the discount rate to 5-1/4 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, Cleveland, St. Louis, Minneapolis, Kansas City, and San Francisco.

2007-10-09

Minute

Minutes of the Federal Open Market Committee September 18, 2007 A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, September 18, 2007 at 8:30 a.m. Present:Mr. Bernanke, Chairman Mr. Geithner, Vice Chairman Mr. Evans Mr. Hoenig Mr. Kohn Mr. Kroszner Mr. Mishkin Mr. Poole Mr. Rosengren Mr. WarshMr. Fisher, Ms. Pianalto, and Messrs. Plosser and Stern, Alternate Members of the Federal Open Market Committee Messrs. Lacker and Lockhart, and Ms. Yellen, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco, respectively Mr. Madigan, Secretary and Economist Ms. Danker, Deputy Secretary Ms. Smith, Assistant Secretary Mr. Skidmore, Assistant Secretary Mr. Alvarez, General Counsel Mr. Baxter, Deputy General Counsel Ms. Johnson, Economist Mr. Stockton, Economist Messrs. Clouse, Connors, Fuhrer, Kamin, Rasche, Slifman, and Wilcox, Associate Economists Mr. Dudley, Manager, System Open Market Account Ms. J. Johnson, 1 Secretary, Office of the Secretary, Board of Governors Mr. Frierson, 1 Deputy Secretary, Office of the Secretary, Board of Governors Ms. Bailey 1 and Mr. Roberts, 1 Deputy Directors, Division of Banking Supervision and Regulation, Board of Governors Mr. English, Senior Associate Director, Division of Monetary Affairs, Board of Governors Ms. Liang and Mr. Reifschneider, Associate Directors, Division of Research and Statistics, Board of Governors Mr. Wright, Deputy Associate Director, Division of Monetary Affairs, Board of Governors Mr. G. Evans, 1 Assistant Director, Division of Reserve Bank Operations and Payment Systems, Board of Governors Mr. Blanchard, Assistant to the Board, Office of Board Members, Board of Governors Mr. Oliner, Senior Adviser, Division of Research and Statistics, Board of Governors Mr. Meyer, Visiting Reserve Bank Officer, Division of Monetary Affairs, Board of Governors Mr. Small, Project Manager, Division of Monetary Affairs, Board of Governors Mr. Natalucci, Senior Economist, Division of Monetary Affairs, Board of Governors Mr. Luecke, Senior Financial Analyst, Division of Monetary Affairs, Board of Governors Ms. Beattie, 1 Assistant to the Secretary, Office of the Secretary, Board of Governors Ms. Low, Open Market Secretariat Specialist, Division of Monetary Affairs, Board of Governors Ms. Holcomb, First Vice President, Federal Reserve Bank of Dallas Messrs. Judd, Rosenblum, and Sniderman, Executive Vice Presidents, Federal Reserve Banks of San Francisco, Dallas, and Cleveland, respectively Messrs. Dzina and Hakkio, Mses. Krieger 1 and Mester, and Messrs. Rolnick and Weinberg, Senior Vice Presidents, Federal Reserve Banks of New York, Kansas City, New York, Philadelphia, Minneapolis, and Richmond, respectively Messrs. Krane, Peach, and Robertson, Vice Presidents, Federal Reserve Banks of Chicago, New York, and Atlanta, respectively 1.  Attended portion of the meeting relating to the discussion of approaches to stabilizing money markets. Return to textIn the agenda for this meeting, it was reported that advices of the election of Charles L. Evans as a member of the Federal Open Market Committee had been received and that he had executed his oath of office. By unanimous vote, the Federal Open Market Committee selected James A. Clouse and Daniel G. Sullivan to serve as Associate Economists until the selection of their successors at the first regularly scheduled meeting of the Committee in 2008. The Manager of the System Open Market Account (SOMA) reported on recent developments in foreign exchange markets. There were no open market operations in foreign currencies for the System's account in the period since the previous meeting. The Manager also reported on developments in domestic financial markets and on System open market operations in government securities and federal agency obligations during the period since the previous meeting. By unanimous vote, the Committee ratified these transactions. The information reviewed at the September meeting suggested that economic activity advanced at a moderate rate early in the third quarter. After expanding at a robust pace in July, retail sales rose at a somewhat slower rate in August. Orders and shipments of capital goods posted solid gains in July. However, residential investment weakened further, even before the recent disruptions in mortgage markets. In addition, private payrolls posted only a small gain in August, and manufacturing production decreased after gains in the previous two months. Meanwhile, core inflation rose a bit from the low rates observed in the spring but remained moderate through July. Private nonfarm payroll employment rose only modestly in August, and the levels of employment in June and July were revised down. The weakness in employment was spread fairly widely across industries. Residential construction and manufacturing posted noticeable declines in jobs, employment in wholesale trade and transportation was little changed, and hiring at business services was well below recent trends. Both the average workweek and aggregate hours were unchanged in August. The unemployment rate held steady at 4.6 percent, 0.1 percentage point above its second-quarter level and equal to its 2006 average. After posting solid gains in June and July, total industrial production edged up only a bit in August. This increase was attributable to a surge in electricity generation, as temperatures swung from mild in July to very warm in August. After large gains in the preceding two months, manufacturing output declined in August, held down by a decrease in the production of motor vehicles and parts. High-tech output rose only modestly in August, but production gains in June and July were revised up considerably. Consumer spending appeared to have strengthened early in the summer from its subdued second-quarter pace. Although auto sales were weak in July, real outlays for other goods rose briskly. At the same time, spending on services was up moderately despite a drop in outlays for energy associated with relatively cool weather in the eastern part of the United States. In August, consumption appeared to have posted another solid gain. Although nominal retail sales outside the motor vehicle sector were about flat (abstracting from a drop in nominal sales at gasoline stations associated with falling gas prices), vehicle sales stepped up and warmer weather likely caused an increase in energy usage. Real disposable income rose further in July, as wages and salaries posted a strong gain and energy prices came down. However, household wealth likely was providing a diminishing impetus to the pace of spending, reflecting recent declines in stock market wealth and an apparent further deceleration in house prices. Readings on consumer sentiment turned down in August after having risen in July, and the Reuters/Michigan index remained near its relatively low August level in early September. The housing sector remained exceptionally weak. Home sales had dropped considerably this year: Sales of new and existing single-family homes in July were down substantially from their averages over the second half of last year. Demand was restrained by deteriorating conditions in the subprime mortgage market and by an increase in rates for thirty-year fixed-rate conforming mortgages. In the nonconforming mortgage market, the availability of financing to borrowers recently appeared to have been crimped even further. Most forward-looking indicators of housing demand, including an index of pending home sales, pointed to a further deterioration in sales in the near term. Single-family starts slid in July to their lowest reading since 1996, and adjusted permit issuance continued on a downward trajectory. Although single-family housing starts had come down substantially from their peak, the drop had lagged the decline in demand, and as a result, inventories of new homes had risen considerably. In the multifamily sector, starts in July were in line with readings thus far this year and at the low end of the fairly narrow range seen since 1997. Meanwhile, house prices generally continued to decelerate. Orders and shipments of capital goods posted a strong gain early in the third quarter. In particular, orders and shipments of equipment outside the high-tech and transportation sector registered a robust increase in July, and data on computer production and shipments of high-tech goods pointed to solid increases in business demand for high-tech. In contrast, indicators of spending for transportation equipment were mixed. Aircraft shipments in July and public information on Boeing's deliveries suggested that domestic spending on aircraft was retreating somewhat in the current quarter. While fleet sales of light vehicles appeared to have moved up in July and August, sales of medium and heavy trucks remained below the second-quarter average. More generally, surveys of business conditions suggested that increases in business activity were somewhat slower in August than in the second quarter. Book-value data for the manufacturing and trade sectors excluding motor vehicles and parts suggested that inventory accumulation stepped down noticeably in July from the second-quarter pace. Inventories of light motor vehicles rose again in July and August. The number of manufacturing purchasing managers who viewed their customers' inventory levels as too low in August slightly exceeded the number who saw them as too high. The U.S. international trade deficit narrowed slightly in July, as exports increased more than imports. Sharp increases in exports of both aircraft and automobiles contributed importantly to the overall gain. Exports of agricultural products and consumer goods were also strong. In contrast, exports of industrial supplies and semiconductors exhibited declines. The value of imported goods and services was boosted by a large increase in imports of automotive products. Higher imports of capital goods excluding aircraft, computers, and semiconductors and of oil also contributed to the overall gain in imports. Economic growth slowed in the second quarter in most advanced foreign economies, except the United Kingdom. The step-down was most pronounced in Japan, where GDP contracted, but was also substantial in the euro area, where total domestic demand rose only slightly. Although growth remained robust in Canada, data late in the quarter, including retail sales, indicated a more significant weakening in activity. This softness appeared to have continued into the third quarter in some economies. In July, indicators for Europe generally moderated, on balance, from their second-quarter levels; those for Canada and Japan, however, slowed more notably. Most of the readings available on economic developments after August 9, when financial turmoil intensified, were measures of confidence. They dropped, on average, but otherwise were consistent with the indicators reported for July. Data through July suggested that economic activity in emerging-market countries remained robust. Output in the Asian economies soared in the second quarter, and several countries posted growth at or near double-digit rates. In Latin America, output in Mexico and Venezuela rebounded sharply from earlier weakness. Indicators for China in July pointed to only a modest slowing of output growth from its torrid pace in the first half of the year. The scant data for August received thus far provided little indication that the turmoil in financial markets had a significant negative impact on real economic activity in emerging-market economies. After rapid price increases earlier this year, U.S. headline consumer price inflation was moderate in both June and July. Although food prices continued their string of sizable increases, energy prices fell in June and July and gasoline prices appear to have dropped further in August. Core PCE prices rose 0.2 percent in June and 0.1 percent in July. On a twelve-month-change basis, core PCE inflation in July was below the comparable rate twelve months earlier. Step-downs in price inflation for prescription drugs, motor vehicles, and nonmarket services accounted for nearly all of the deceleration in core PCE prices. Although owners' equivalent rent decelerated over the past year, this change was largely offset by an acceleration in tenants' rent and lodging away from home. Household surveys indicated that the median expectation for year-ahead inflation declined in August and edged down further in early September to a level only slightly above the reading at the turn of the year; the median expectation of longer-term inflation in early September remained in the range seen over the past couple of years. The producer price index for core intermediate materials rose only modestly in July. Compensation per hour decelerated in the second quarter. Nonetheless, the increase over the four quarters ending in the second quarter was noticeably above the increase in the preceding four quarters and well above the rise in the employment cost index over the same period. At its August meeting, the FOMC decided to maintain its target for the federal funds rate at 5-1/4 percent. In the statement, the Committee acknowledged that financial markets had been volatile in recent weeks, credit conditions had become tighter for some households and businesses, and the housing correction was ongoing. The Committee reiterated its view that the economy seemed likely to continue to expand at a moderate pace over coming quarters, supported by solid growth in employment and incomes and a robust global economy. Readings on core inflation had improved modestly in recent months. However, a sustained moderation in inflation pressures had yet to be convincingly demonstrated. Moreover, the high level of resource utilization had the potential to sustain these pressures. Although the downside risks to growth had increased somewhat, the Committee repeated that its predominant policy concern remained the risk that inflation would fail to moderate as expected. Future policy adjustments would depend on the outlook for both inflation and economic growth, as implied by incoming information. The FOMC's policy decision and the accompanying statement were about in line with market expectations, and reactions in financial markets were muted. In the days after the August FOMC meeting, financial market participants appeared to become more concerned about liquidity and counterparty credit risk. Unsecured bank funding markets showed signs of stress, including volatility in overnight lending rates, elevated term rates, and illiquidity in term funding markets. On August 10, the Federal Reserve issued a statement announcing that it was providing liquidity to facilitate the orderly functioning of financial markets. The Federal Reserve indicated that it would provide reserves as necessary through open market operations to promote trading in the federal funds market at rates close to the target rate of 5-1/4 percent. The Federal Reserve also noted that the discount window was available as a source of funding. On August 17, the FOMC issued a statement noting that financial market conditions had deteriorated and that tighter credit conditions and increased uncertainty had the potential to restrain economic growth going forward. The FOMC judged that the downside risks to growth had increased appreciably, indicated that it was monitoring the situation, and stated that it was prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets. Simultaneously, the Federal Reserve Board announced that, to promote the restoration of orderly conditions in financial markets, it had approved a 50 basis point reduction in the primary credit rate to 5-3/4 percent. The Board also announced a change to the Reserve Banks' usual practices to allow the provision of term financing for as long as thirty days, renewable by the borrower. In addition, the Board noted that the Federal Reserve would continue to accept a broad range of collateral for discount window loans, including home mortgages and related assets, while maintaining existing collateral margins. On August 21, the Federal Reserve Bank of New York announced some temporary changes to the terms and conditions of the SOMA securities lending program, including a reduction in the minimum fee. The effective federal funds rate was somewhat below the target rate for a time over the intermeeting period, as efforts to keep the funds rate near the target were hampered by technical factors and financial market volatility. In the days leading up to the FOMC meeting, however, the funds rate traded closer to the target. Short-term financial markets came under pressure over the intermeeting period amid heightened investor unease about exposures to subprime mortgages and to structured credit products more generally. Rates on asset-backed commercial paper and on low-rated unsecured commercial paper soared, and some issuers, particularly asset-backed commercial paper programs with investments in subprime mortgages, found it difficult to roll over maturing paper. These developments led several programs to draw on backup lines, exercise options to extend the maturity of outstanding paper, or even default. As a result, asset-backed commercial paper outstanding contracted substantially. Investors sought the safety and liquidity of Treasury securities, and yields on Treasury bills dropped sharply for a period; trading conditions in the bill market were impaired at times. Meanwhile, banks took measures to conserve their liquidity and were cautious about counterparties' exposures to asset-backed commercial paper. Term interbank funding markets were significantly impaired, with rates rising well above expected future overnight rates and traders reporting a substantial drop in the availability of term funding. Pressures eased a bit in mid-September, but short-term financial markets remained strained. Conditions in corporate credit markets were mixed. Investment- and speculative-grade corporate bond spreads edged up; they were near their highest levels in four years, although they remained far below the peaks seen in mid-2002. Investment-grade bond issuance was strong in August as yields declined, but issuance of speculative-grade bonds was scant. Speculative-grade bond deals and leveraged loans slated to finance leveraged buyouts continued to be delayed or restructured. Bank lending to businesses surged in August, apparently because some banks funded leveraged loans that they had intended to syndicate to institutional investors and perhaps because some firms substituted bank credit for commercial paper. Although markets for nonconforming mortgages were impaired over the intermeeting period, the supply of conforming mortgages seemed to have been largely unaffected by recent developments. Broad stock price indexes were volatile but about unchanged, on net, over the intermeeting period. The foreign exchange value of the dollar against other major currencies fell, on balance. Investors appeared to mark down significantly their expected path for the federal funds rate during the intermeeting period, evidently in response to the strains in money and credit markets and a few key data releases, including weaker-than-expected reports on housing activity and employment. Yields on nominal Treasury securities fell appreciably across the term structure. TIPS-based inflation compensation at the five-year horizon was about unchanged, while inflation compensation at longer horizons crept higher. Growth of nonfinancial domestic debt was estimated to have slowed a little in the third quarter from the average pace in the first half of the year. The deceleration in total nonfinancial debt reflected a projected slowdown in borrowing across all major sectors of the economy excluding the federal government. Although it decelerated in the third quarter, business-sector debt continued to advance at a solid pace, boosted by a surge in business loans. In the household sector, mortgage borrowing was estimated to have slowed notably, as mortgage interest rates moved up, nonconforming mortgages became harder to obtain, and as home sales slowed and house prices decelerated. M2 increased at a brisk pace in August. The rise was led by a surge in liquid deposits and in retail money funds as investors adjusted their portfolios in response to the turmoil in financial markets. In preparation for this meeting, the staff continued to estimate that real GDP increased at a moderate rate in the third quarter. However, the staff marked down the fourth-quarter forecast, reflecting a judgment that the recent financial turbulence would impose restraint on economic activity in coming months, particularly in the housing sector. The staff also trimmed its forecast of real GDP growth in 2008 and anticipated a modest increase in unemployment. Softer demand for homes amid a reduction in the availability of mortgage credit would likely curtail construction activity through the middle of next year. Moreover, lower housing wealth, slower gains in employment and income, and reduced confidence seemed likely to restrain consumer spending in 2008. Despite the recent difficulties in some corporate credit markets, financial conditions confronting most nonfinancial businesses did not appear to have tightened appreciably to date. But going forward, the staff anticipated that businesses would scale back their capital spending a touch in response to financing conditions that were likely to become a little less accommodative and to more modest gains in sales. With credit markets expected to largely recover over coming quarters, growth of real GDP was projected to firm in 2009 to a pace a bit above the rate of growth of its potential. Incoming data on consumer price inflation that were slightly to the low side of the previous forecast, in combination with the easing of pressures on resource utilization in the current forecast, led the staff to trim slightly its forecast for core PCE inflation. Headline PCE inflation, which was boosted by sizable increases in energy and food prices earlier in the year, was expected to slow in 2008 and 2009. In their discussion of the economic situation and outlook, meeting participants focused on the potential for recent credit market developments to restrain aggregate demand in coming quarters. The disruptions to the market for nonconforming mortgages were likely to reduce further the demand for housing, and recent financial developments could well lead to a more general tightening of credit availability. Moreover, some recent data and anecdotal information pointed to a possible nascent slowdown in the pace of expansion. Given the unusual nature of the current financial shock, participants regarded the outlook for economic activity as characterized by particularly high uncertainty, with the risks to growth skewed to the downside. Some participants cited concerns that a weaker economy could lead to a further tightening of financial conditions, which in turn could reinforce the economic slowdown. But participants also noted that the resilience of the economy in the face of a number of previous periods of financial market disruptions left open the possibility that the macroeconomic effects of the financial market turbulence would prove limited. Although financial markets were expected to stabilize over time, participants judged that credit markets were likely to restrain economic growth in the period ahead. Given existing commitments to customers and the increased resistance of investors to purchasing some securitized products, banks might need to take a large volume of assets onto their balance sheets over coming weeks, including leveraged loans, asset-backed commercial paper, and some types of mortgages. Banks' concerns about the implications of rapid growth in their balance sheets for their capital ratios and for their liquidity, as well as the recent deterioration in various term funding markets, might well lead banks to tighten the availability of credit to households and firms. Tighter credit conditions were likely to weigh particularly on residential investment and to a lesser extent on other components of aggregate demand in coming quarters. Meeting participants also noted that financial market conditions, while seeming to have improved somewhat in the most recent days, were still fragile and that further adverse credit market developments could well increase the downside risks to the economy. Even after market volatility subsided and the recent strains eased, risk spreads probably would be wider and credit terms tighter than they had been a few months ago. Although these developments would likely be consistent with longer-term financial stability, they were likely to exert some restraint on aggregate demand. In their discussion of individual sectors of the economy, participants noted that recent data suggested greater weakness in the housing market than had previously been expected. Furthermore, recent financial developments had the potential to deepen further and prolong the downturn in the housing market, as subprime mortgages remained essentially unavailable, little activity was evident in the markets for other nonprime mortgages, and prime jumbo mortgage borrowers faced higher rates and tighter lending standards. The faster pace of foreclosures as subprime mortgage rates reset was also seen as posing a downside risk to the housing market. Nonetheless, participants observed that conforming mortgages remained readily available to creditworthy borrowers and that rates on these mortgages had declined in recent weeks. Moreover, conditions in the jumbo mortgage market were expected to improve gradually over time. Although employment probably was not as weak as the most recent monthly data had suggested, trend growth in jobs had fallen off even prior to the recent financial market strains, and participants judged that some further slowing of employment growth was likely. Indeed, financial services firms had already announced layoffs, largely reflecting mortgage market developments, the demand for temporary workers appeared to have softened, and the most recent weakening in construction employment was likely to continue for a while. Moreover, if declines in house prices were to damp consumption, that could feed back on employment and income, exerting additional restraint on the demand for housing. Nonetheless, to date, initial claims for unemployment insurance did not indicate a substantial and widespread weakening in labor demand, and labor markets across the country generally remained fairly tight, with several participants citing continued reports of shortages of labor from their contacts in some sectors. Participants thought that the most likely prospect was for consumer expenditures to continue to expand at a moderate pace on average over coming quarters, supported by growth in employment and income. However, some participants saw indications of a possible weakening of consumer spending. Sales of automobiles and building materials had flagged of late, and survey measures suggested that consumer confidence had been adversely affected by the recent financial market developments. Also, a further tightening of terms for home equity lines of credit and second mortgages seemed possible, which could weigh on consumer spending, especially for consumer durables. Participants reported that recent financial market developments generally appeared to have had limited effects to date on business capital spending plans and expected that business investment was likely to remain healthy in coming quarters. The access of investment-grade corporate borrowers to credit so far remained unimpeded, and rates on investment-grade bonds had declined in recent weeks. Moreover, participants noted that many capital expenditures were internally financed, making them less sensitive to credit market conditions. Nonetheless, the pace of financing for lower-rated firms--including issuance of both speculative-grade bonds and leveraged loans--had slowed sharply over the summer. Participants also noted that standards and terms for commercial real estate credit reportedly had tightened, and that credit availability for homebuilders could be trimmed going forward. In addition, contacts indicated that business executives in parts of the country had apparently become somewhat more cautious and that some were delaying investment outlays in view of heightened economic and financial uncertainty. Some participants noted that foreign demand remained robust and net exports appeared strong. Port utilization rates reportedly remained high. Participants discussed the turbulence in foreign financial markets and noted that unusually high precautionary demand for dollar-denominated term funding in Europe had added to strains in U.S. interbank markets and contributed to a wide spread between libor and federal funds rates. Participants made only modest revisions to their outlook for inflation in the period since the Committee's last regular meeting. Still, they recognized that incoming data on core inflation continued to be favorable, and they generally were a little more confident that the decline in inflation earlier this year would be sustained. Inflation expectations seemed to be contained, and the less robust economic outlook implied somewhat less pressure on resources going forward. Participants nonetheless remained concerned about possible upside risks to inflation. Higher benefit costs, rising unit labor costs more generally, reduced markups, and levels of resource utilization both in the United States and abroad that remained relatively high were all cited as factors that could contribute to inflationary pressures. Inflation risks could be heightened if the dollar were to continue to depreciate significantly. In the Committee's discussion of policy for the intermeeting period, all members favored an easing of the stance of monetary policy. Members emphasized that because of the recent sharp change in credit market conditions, the incoming data in many cases were of limited value in assessing the likely evolution of economic activity and prices, on which the Committee's policy decision must be based. Members judged that a lowering of the target funds rate was appropriate to help offset the effects of tighter financial conditions on the economic outlook. Without such policy action, members saw a risk that tightening credit conditions and an intensifying housing correction would lead to significant broader weakness in output and employment. Similarly, the impaired functioning of financial markets might persist for some time or possibly worsen, with negative implications for economic activity. In order to help forestall some of the adverse effects on the economy that might otherwise arise, all members agreed that a rate cut of 50 basis points at this meeting was the most prudent course of action. Such a measure should not interfere with an adjustment to more realistic pricing of risk or with the gains and losses that implied for participants in financial markets. With economic growth likely to run below its potential for a while and with incoming inflation data to the favorable side, the easing of policy seemed unlikely to affect adversely the outlook for inflation. The Committee agreed that the statement to be released after the meeting should indicate that the outlook for economic growth had shifted appreciably since the Committee's last regular meeting but that the 50 basis point easing in policy should help to promote moderate growth over time. They also agreed that the inflation situation seemed to have improved slightly and judged that it was no longer appropriate to indicate that a sustained moderation in inflation pressures had yet to be shown. Nonetheless, all agreed that some inflation risks remained and that the statement should indicate that the Committee would continue to monitor inflation developments carefully. Given the heightened uncertainty about the economic outlook, the Committee decided to refrain from providing an explicit assessment of the balance of risks, as such a characterization could give the mistaken impression that the Committee was more certain about the economic outlook than was in fact the case. Future actions would depend on how economic prospects were affected by evolving market developments and by other factors. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive: "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee in the immediate future seeks conditions in reserve markets consistent with reducing the federal funds rate to an average of around 4-3/4 percent." The vote encompassed approval of the text below for inclusion in the statement to be released at 2:15 p.m.: "Developments in financial markets since the Committee's last regular meeting have increased the uncertainty surrounding the economic outlook. The Committee will continue to assess the effects of these and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth." Votes for this action: Messrs. Bernanke, Geithner, Evans, Hoenig, Kohn, Kroszner, Mishkin, Poole, Rosengren, and Warsh. Votes against this action: None. The Committee then resumed its discussion of monetary policy communication issues. Subsequently, in a joint session of the Federal Open Market Committee and the Board of Governors, Board members and Reserve Bank presidents discussed additional policy options to address strains in money markets. No decisions were made in this session, but it was agreed that policymakers should continue to consider such options carefully. It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, October 30-31, 2007. The meeting adjourned at 3:55 p.m. Notation Vote By notation vote completed on August 27, 2007, the Committee unanimously approved the minutes of the FOMC meeting held on August 7, 2007. Conference Calls On August 10, 2007, the Committee reviewed developments in money and credit markets, where strains had worsened in the days since its last meeting. Participants discussed the condition of domestic and foreign financial markets, the Open Market Desk's approach to open market operations, possible adjustments to the discount rate, and the statement to be issued immediately after the conference call. On August 16, 2007, the Committee again met by conference call. With financial market conditions having deteriorated further, meeting participants discussed the potential usefulness of various policy responses. The discussion focused primarily on changes associated with the discount window that would be directed at improving the functioning of the money markets. Most participants expressed strong support for taking such steps, although some concern was noted about the likely effectiveness of these measures and one participant also questioned their appropriateness. In light of the risks posed to the economic outlook by the tighter credit conditions and the increased uncertainty in financial markets, the Committee felt that the downside risks to growth had increased appreciably, but that a change in the federal funds rate target was not yet warranted. However, the situation bore close watching. At the conclusion of the discussion, the Committee voted to approve the text below to be released the following morning: "Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward. In these circumstances, although recent data suggest that the economy has continued to expand at a moderate pace, the Federal Open Market Committee judges that the downside risks to growth have increased appreciably. The Committee is monitoring the situation and is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets." Votes for: Messrs. Bernanke, Geithner, Fisher, Hoenig, Kohn, Kroszner, Mishkin, Moskow, Rosengren, and Warsh. Votes against: None. Mr. Fisher voted as alternate member. Brian F. Madigan Secretary