David H. Small, Project Manager, Division of Monetary Affairs,U.S. Federal Reserve Meeting Minutes for September 21 (Text)
2010-10-12 18:00:09.329 GMT
Oct. 12 -- Following are the minutes of the
Federal Reserve’s Open Market Committee meeting that concluded on
September 21.
Minutes of the Federal Open Market Committee
September 21, 2010
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 inter-meeting
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 Re-serve 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 transac-tions 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 de-pressed. 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 person-al 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 house-hold 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 ? percent target range for the
federal funds rate was widely anticipated, but Treasury yields
declined as investors reportedly focused on the indication in the
ac-companying 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 sof-ter
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 out-look,
meeting participants generally agreed that the in-coming 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 un-certain 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 re-ported 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 ? 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 ? 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
maxi-mum 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 antic-ipates 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 maxi-mum employment and price
stability. With substantial resource slack continuing to re-strain
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 ? 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.
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